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A good time to cash out

With Diageo in the saddle, Vijay Mallya’s residual stake could become valuable.

india Updated: Nov 12, 2012 18:18 IST

Vijay Mallya’s exit from the hugely profitable liquor business he inherited and grew to a scale that dwarfs the competition in India is being seen as the price of hubris. Mr Mallya’s extravagant lifestyle has turned public perception against the King of Good Times when 6,000-odd employees of his Kingfisher Airlines have not been paid wages for months. Yet, the flamboyance masks a sharp business brain that can spot opportunity and pre-empt negative outcomes. The sale of a controlling stake in United Spirits to the world’s largest liquor company Diageo falls into the latter category.

Sales of that bureaucratic coinage, Indian-made foreign liquor, are growing moderately. Sales of “foreign-made foreign liquor” in the country are growing much faster, on the other hand. Mr Mallya’s breweries supply half the liquor Indians quaff, but they can’t brew the stuff the country’s newly rich is thirsting for. He tried breaking into the closed club of Scotch manufacturers by buying one of them, White & Mackay, but it’s not the same as having the portfolio of brands Diageo has. United Spirits has not been able to take its brands abroad because the Scotch Whisky Association does consider molasses-based Indian spirits as whisky. Mr Mallya was facing headwinds at home and in potential new markets. It was a good time to cash out. He gets cash to pump into his bleeding airline, if he chooses to, and his residual stake in the liquor business could become much more valuable with Diageo in the saddle.

The holding pattern of the group companies suggests Mr Mallya will get a third of what he needs to get Kingfisher Airlines back in the air. If he wants to push more of the Diageo deal proceeds towards the airline business, he must rethink the value proposition Kingfisher Airlines was bringing to the industry. The airline was designed to give Indians a rich flying experience, which did not find enough takers in the price-conscious Indian market. Having made billions in non-premium liquor, Mr Mallya’s experience with aspirational air travel has obviously not worked. If Kingfisher flies again it will be a different bird, with lessons learnt from frugal carriers that have not burned gaping holes in their owners’ pockets. Part of the hype Mr Mallya created around his airline is due to the ban on advertising liquor in the country. With a receding need for surreptitious advertising — Kingfisher Airlines derives its name from United Spirits’ flagship beer brand — the airline could be carrying less baggage in its second avatar. But it is an open question whether Mr Mallya will want to rescue his airline. Had liquidating businesses been an easier process than it is in India, workers, lenders and shareholders of Kingfisher Airlines may have been spared some of the agony they are undergoing.