United Spirits seeks to declare itself ‘sick’

United Spirits, India’s market leader in spirits in which Diageo holds a controlling 55% stake, wants its shareholders to declare the company “sick”.

The board has called an extraordinary general meeting of shareholders for January 22 to consider a motion which would comply with Indian stock market regulations. These require any company whose net value has fallen by 50% or more over the past four financial years to report the position under the country’s Sick Industrial Companies Act.

In the four years to last March USL’s net worth has plummeted from £595m to £87m.

Significantly, the move by the Diageo-controlled board, is seen as a further attack on Vijay Mallya, the present non-executive chairman and the chief executive prior to Diageo taking control in April 2014.

To support the EGM motion, USL has drawn up a report to shareholders which blames the deterioration in its net value on “the diminution in the value of long-term investments in subsidiaries and loans and advances to subsidiaries due to low capacity utilisation, negative margins or strategic shift in business” (£72m) and “provision on advances to United Breweries (Holdings)” (£101m).

The remainder of the losses is made up of falling values of investments in and advances to overseas subsidiaries and losses on the sale of sales of stakes in subsidiaries. In addition there are provisions for doubtful debts, advances and deposits totalling some £115m.

Since Diageo took the helm at USL, the company’s fortunes have improved notably. It has reorganised the board, the company’s structure and its trading strategy. It made cash profits in the six months to last September and in general analysts believe the company’s fortunes are on an upward path. That is critical to Diageo’s own long-term strategy as it sees India accounting for some 10% of its global business within the next few years.

Last April the USL board asked Mallya to step down as chairman following delivery of a report from accountants PriceWaterhouse which alleged “various improprieties and legal violations” in loans worth almost £1.4bn to UB and its subsidiaries. Mallya holds a 33% stake in United Breweries and is its chairman.

He has consistently refused to relinquish the USL chair, despite mounting pressure from Diageo and USL’s own board.
It is commonly believed that the loans were used by Mallya to shore up his ill-fated Kingfisher airline which went spectacularly bust in 2012. In that respect he has been declared a “wilful defaulter” by several banks holding Kingfisher debt.

Several banks have also seized Mallya-controlled shares in USL so that his stake now teeters just above the 1% stake he needs to retain the USL chair as part of the with Diageo in which it agreed to his remaining non-executive chairman until 2017 in return for his support in the takeover of USL. It is believed that the agreement becomes void if his shareholding falls below 1%.

It is inconceivable that USL’s shareholders will not support the motion to declare the company “sick” as Diageo has a controlling vote with 55% of the equity. That will heap more pressure on Mallya to step down.

At the USL AGM in November he hinted that he might consider resigning after his 60th birthday. That fell on December 18 – and was celebrated according to reports from India in his trademark flamboyant style.