Vijay Mallya: an unsubtle farewell

As Vijay Mallya steps down as chairman of Diageo-owned United Spirits with a £53 million pay-off, we analyse his flamboyant rise to, and tumultuous fall from, the pinnacle of the drinks industry.

Vijay Mallya (Photo: Wiki)

So Vijay Mallya, the Indian tycoon dubbed the “Branson of Bangalore” and the “king of the good times” has been defenestrated at United Sprits (USL).

It has cost Diageo at least $75 million to get rid of him as the non-executive chairman of the company he turned into India’s biggest spirits group, but shareholders will want to know why they have paid so much to someone whose star fell so catastrophically and whose own board demanded he step down amid suggestions of financial impropriety.

Diageo’s directors face some tough questions at the company’s annual general meeting on September 21, despite CEO Ivan Menezes saying that the payoff was “in the best interests of both Diageo and USL.”

While the deal supposedly ends two years of increasing rancour between Mallya and Diageo, Menezes gave no detail of how USL would “build on its strong platform” as a result of Mallya quitting.

Mallya’s rise was almost as spectacular as his fall. His father, Vittal Mallya, bought shares in United Breweries when prohibition was being openly touted in India and went on to buy other breweries at knockdown prices. When prohibition was shelved, the Mallya drinks empire was well established.

When his father died from a heart attack in 1983, Vijay took the helm at the age of just 27. After years of wheeler dealing in various sectors, his breakthrough came in 2005 when he landed Shaw Wallace, India’s second biggest spirits company.

He had stalked it for 20 years despite open hostility from the owning Chabria family. Despite that, he prevailed, winning a hostile bid that deal gave him 60% of India’s spirits market and underpinned his later claim that he had turned USL from a three million case company to a 100 million-plus behemoth.

Though his United Breweries was flourishing, especially with the relaunch of the moribund Kingfisher brand, and by the mid 2000s, Mallya was in frenetic takeover mode. He contested the auction for Taittinger Champagne (and accepted Buvet Ladubay in Saumur as a consolation prize). In 2007, he paid a massive £700m for Whyte & Mackay Scotch, now owned by Emperador of the Philippines.

Always extravagant, Mallya loved the high-life, travelling in his private jet and backing high-profile sports teams such as Royal Challengers Bangalore in the Indian Premier cricket league and the Force India Grand Prix team.

But it was his sky-high ambition to own an airline that triggered his downfall. Launched in 2007 as an intercontinental version of Ryanair in Europe, Mallya predicted even greater fame and fortune for himself as the owner of a mega no-frills airline. But his timing was catastrophic.

With the global financial crisis unfolding as his first aircraft took off, Kingfisher Airlines never made money and collapsed into bankruptcy in 2012 with debts of more than $1 billion. Staff went unpaid, planes were impounded and the banks called in their loans.

In the early 2000s Diageo had failed to cover itself in glory with its India operations, only to see arch rival Pernod Ricard become the leading importer of spirits following its successful takeover of Seagram’s operation on the sub-continent.

Diageo’s then chief executive Paul Walsh recognised the potential in India and knew by 2009/10 that the world’s biggest spirits group needed to regain lost ground. USL was an obvious target but Walsh (never known for overpaying) countered rumours of a bid saying that “Dr Mallya’s valuation of his business far exceeds mine”.

The pressures on both mounted. Walsh needed to keep setting the pace in the industry and Mallya needed cash.

In 2012 they announced a deal. Diageo agreed to buy a controlling interest in USL (propped up by Mallya votes in the boardroom). After the failure of a subsequent messy tender offer to buy USL shares in the market, Diageo ended up paying roughly £1.8 billion for the controlling 55% of USL it owns today.

For his part, Mallya retained the chairmanship, but only as a non-executive director, in return for a four-year deal to vote United Breweries’ shares with Diageo’s USL directors.

The initial deal was hailed at the time as a final masterstroke by Walsh, who stepped down as Diageo’s CEO in 2013, handing over to Menezes, who is trying to steer USL, with some success, to better times despite the difficulties of the past two years.

One of the questions Diageo will have to face at the AGM is about the depth and accuracy of its due diligence before agreeing the takeover of USL with Mallya.

During the finalisation of USL’s accounts for the year to March 2014, various transactions were uncovered that the auditors refused to sign off. These included loans from United Spirits to other UB Group companies and lower debt claimed by some United Spirits debtors than what was owed to the company.

By then Mallya had been declared a “wilful defaulter” (possessing assets but unwilling to pay) by several Indian banks and USL had failed three times to have its accounts approved by its own (Diageo-controlled) audit committee.

USL said it was investigating whether the company or its executives had violated rules by lending cash to UB Group companies and in October 2014 it set up an independent investigation by auditors from PwC [correct]. By then Mallya controlled just 5% of USL as lenders to UB group companies sold the shares pledged to them to recover part of their loans.

In April 2015 PwC reported that Mallya may have been party to financial irregularities and that USL may have underestimated the extent of its loans to UB. These allegations are under investigation by the Indian financial authorities. Mallya has always denied any impropriety.

While specifically avoiding any hint “as to fault or culpability”, the Diageo-controlled USL board said it had lost confidence in Mallya and demanded his resignation. He refused, saying that to do so would be tantamount to admitting guilt and that he had a binding contract with Diageo.

All the while, USL was losing market share in India as Diageo sought to bring its accounting into line with its own, rationalise the portoflio and focus on margins rather than volume. USL’s latest results showed the strategy was having a positive effect.

Even so, the hostility deepened as Diageo threatened to seek redress from Mallya’s companies over a £96m defaulted loan for which it had issued a guarantee and he promised to sue over an alleged agreement to set up a joint venture in South Africa.

Despite Mallya chairing USL’s annual meeting in January, it was obvious that Diageo was doing everything it could to distance itself from him. His presence at USL was a reminder of the on-going doubts about the company’s solidity and there were even rumours that having a “wilful defaulter” on the board was hampering some of its day-to-day financing.

Shareholders feared that the wrangling and rancour might mean Diageo might had taken its eye off the global picture.

Now Menezes has acted. He has had to abandon any potential personal claims against Mallya, pay him $75m and pick up the £96m tab for the defaulted loan. Diageo will seek redress from various Mallya corporate entities but the process may be long and torturous, as lenders to Kingfisher Airlines can testify. It will also attempt to recoup the £140m loans to UB.

Meanwhile, Diageo will continue to sponsor Mallya’s Royal Challengers Bangalore cricket team and the Smirnoff logo will appear on his Force India grand prix cars for at least five years. There are strong marketing reasons for extending these arrangements.

Mallya’s son Sidhartha will have a token seat on the the cricket team’s board and Mallya himself has been given the honorary title of “Founder Emeritus – USL”. Indeed, because some of Diageo’s attempts to recoup monies from Mallya companies may involve Watson, a subsidiary that part owns Force India, Diageo could end up as owner of half of the grand prix team.

Mallya, who remains chairman of United Breweries despite ceding effective control to Heineken, says the agreement he struck with Diageo to step down at USL “secures my family legacy”.

Meanwhile, the list of his creditors lengthens.