Mallya ‘about to step down’ from USL

Vijay Mallya is about to step down as chairman of Diageo-controlled United Spirits before what could be an explosive annual meeting on November 24, reports from India claim.

Embattled United Spirits chairman Vijay Mallya (Photo: Wiki)

The reports say that he is in the final stages of negotiation to sell to Diageo his remaining 5% stake in the company for a premium to the current market price, which itself rose by almost 5% in Bombay on the rumours. As part of the transaction, the reports say, Mallya would also step down as chairman and sever his final links with USL before the annual meeting.

Mallya’s aides have denied the reports and the Bombay Stock Exchange has asked for clarification.

The flambuoyant Mallya inherited control of USL from his late father. It became the biggest player in the market, controlling more than 40% of all spirits sales in India on the back of its close association with United Breweries, where Mallya remains the main shareholder.

Diageo bought a controlling stake in USL between 2013 and 2014 for some £1.4bn in a deal that transformed its presence in India, one of the fastest growing world markets for spirits. The two sides had been in on-off negotiations for several years, with Diageo unwilling to pay what it regarded as an inflated price demanded by Mallya.

As a condition of the eventual deal Mallya agreed to pledge support of his remaining shares to Diageo for a four year-period in return for becoming non-executive chairman for the same period.

Almost as soon as the deal had been signed, relationships started to show strains as Diageo put its own executive management into USL and began to unravel some of the more byzantine transactions between USL and United Breweries during Mallya’s control of both companies.

In April this year auditor PriceWaterhouseCooper accused Mallya of illegally diverting about £200m from USL to United Breweries and Mallya’s collapsed Kingfisher Airlines. On the basis of that report the USL board (controlled by Diageo) demanded Mallya’s resignation.

He refused, and stormed out of the meeting, saying he would honour his contractual negotiations to Diageo.

Since then India’s Serious Fraud Investigation Office, the ministry of corporate affairs and the tax authorities have all launched probes into “loans” from USL to UB and Kingfisher and Mallya had been declared a willing defaulter on bank loans made to Kingfisher.

The airline was launched as India’s low-cost equivalent of Ryanair and Easyjet but flew into extreme turbulence when the global financial crisis of 2007/08 hit its business model. People stopped travelling and costs such as aviation fuel soared. Losses mounted and by 2012 the airline was grounded as effectively bankrupt, with staff and airport dues unpaid and planes impounded.

Since the April demand for Mallya’s resignation, Diageo has remained stonily silent about the relationship with him, pointing out that while he held more than 1% of USL’s stock (which he does via UB) it was contractually obliged to support his chairmanship.

Since then relationships have reached virtually rock bottom with the USL board asking Diageo to review its contractual obligations to Mallya before USL’s annual meeting on November 24.

That meeting promised to be stormy, with Mallya adamant that he would chair it, especially as he denies all allegations of impropriety.

If true, however, the reports of a deal for Diageo to buy Mallya’s remaining stake in USL would draw an unhappy chapter to a close for both sides.

The colourful Mallya will avoid the very public embarrassment of a vitriolic annual meeting with independent shareholders lining up against him. At the same time, he will liquidate funds that will go some way to meeting the debts he has incurred at Kingfisher.

Diageo, meanwhile, will welcome an end to the distractions and negative publicity created by the association with Mallya and will further consolidate its hold on USL, which is prospering under its ownership.  After significant structural reorganisation and moving its accounting principles in line with Diageo’s international standards over the past couple of years, the company returned to profit in the second quarter of this year.