Diageo’s Indian intrigue with Mallya goes on

Diageo has chosen the opening of the annual Indian Premier League cricket tournament to further distance itself from Vijay Mallya, the flamboyant entrepreneur from whom it bought control of United Spirits (USL), by far India’s leading spirits producer over the past couple of years.

Vijay Mallya (Photo: Wiki)

Until this season USL was the main sponsor of the Royal Challengers Bangalore (RCB) cricket team, of which Mallya is the figurehead. But that sponsorship has been withdrawn, and for the first time in seven years the Bangalore team will no longer promote USL’s leading Indian whiskies, Royal Challenger and McDowell’s.

Mallya remains the central figure at the RCB cricket franchise, which is a subsidiary of USL, but a Diageo spokesman in India is reported as saying: “Mr Mallya is chairman of the RCB sports management company and is involved in the team in that capacity. The team belongs to USL and there is no ownership by Mr Mallya at all.”

Diageo has ceased to back the team and has asked it to find new sponsors. Speculation is widespread that Diageo will eventually sell the franchise and divorce USL from all connections with RCB. For the present at least, USL says the team is not for sale.

Diageo became the controlling shareholder in USL last year and appointed a new top management team, rapidly integrating the company into its global management structure and practices. While Mallya remains USL’s chairman, he has been shorn of all executive powers.

Diageo is reported as saying of the cricket sponsorship decision: “After the new management took over, they have refocused their investment. In the new environment RCB is not a priority… It was decided to market the properties and have new sponsors on board. It was a conscious call.”

Given the huge popularity of the Twenty 20 cricket format throughout India and on TV globally, the decision to cease using RCB as a promotional vehicle for USL’s brands has surprised some observers. Diageo is nothing but hard-nosed and will not have ignored commercial reality in making its decision, but the call is undoubtedly a further snub to Mallya.

In March it bought him out of a joint venture owning South Africa’s largest sorghum beer producer, National Breweries, for up to £24m. Again that deal had a sound commercial basis, but it was also seen as part of the progressive divorcing of Mallya from his connections with Diageo.

Indeed, Mallya can have been under no illusions that his place on USL’s board was less than welcome since last October when Diageo said in a statement that his role as non-executive chairman was “subject to the absence of defaults by UB Holdings and Dr Mallya”.

UB Holdings is Mallya’s core company and owns about 5% of USL, giving it the right to nominate one director. It needs to hold about 1% of USL’s total share capital to retain that right. As part of the purchase agreement, Diageo pledged to support Mallya while those conditions were met.

However, following the collapse of Mallya’s empire due to multi-billion pound losses at his grounded Kingfisher airline, there are questions about whether UB does indeed retain a sufficient stake in USL to guarantee Mallya his place on the spirit company’s board.

Kingfisher has failed to repay loans of about £1.7bn to a series of Indian banks and Mallya has been declared a “wilful defaulter” by the courts.

Mallya’s Kingfisher airline has been grounded since suffering multi-billion pound losses (Photo: Creative Commons)

That unwanted status has legal implications for Diageo, notably the provisions of America’s Foreign Corrupt Practices Act and similar UK legislation. Hence the strategy of distancing the world’s largest spirits company as far as possible from Mallya.

Indeed, if the Indian banks holding USL shares as collateral against loans to Mallya companies such as Kingfisher and UB seize them, Mallya’s precarious toehold in the USL boardroom could be broken.

There remains a further link between the two. Mallya is “Team Principal” of the Force India Formula 1 grand prix team, which is backed by United Breweries’ Kingfisher beer brand. Last May, Diageo agreed to back Force India and the team’s cars now carry Smirnoff branding. It is not known how long that agreement has to run. Diageo is also a main sponsor of the McLaren Mercedes team on behalf of its Johnnie Walker Scotch brand.

Given Diageo’s desire to distance itself from Mallya and the growing pressure on the F1 industry to drop all connections with alcohol companies, one of the few remaining strands of the relationship between Mallya and Diageo hangs by a thread.