With the recent Diageo deal, the UB group has got some much needed cash to reduce its interest costs. But as major group companies continue to struggle with unfathomable debt loads, the only freely flowing commodity is advice!
It seems sensible to infuse the cash back into the flagship company. Outside of the deal with Diageo, though, United Spirits has few other deleveraging options; such as selling shares worth around Rs.4 billion in its sister concern United Breweries, besides offloading stake in Bangalore Royal Challengers, its IPL team. In an attempt to unlock the value of its non-core assets, the group is said to be mulling over a proposal by private equity fund Blackstone to buy out the prime office, retail & real estate blocks in its flagship UB City for Rs.5.5 billion (at the time of this issue going to print). Over the last one year, the group’s other major business has also turned loss making. Mangalore Chemicals and Fertilizers, which earned a net profit of Rs.29.7 billion for Q1, FY 2011-12, posted a net loss of $12.49 billion for the corresponding period this year, owing to financing costs that rose by almost 400%.
Aviation is clearly the next business to bail out of. Kingfisher Airlines’ debt position has turned from bad to worse since it acquired debt-laden low cost carrier Deccan Aviation. At the time of the deal, the combined losses of the two entities amounted to around Rs.20 billion. This became the starting point for the entire disaster. The situation turned so bad that Kingfisher Airlines has even lost its flying rights due to non-payment of various dues. Its lenders have refused to provide any further assistance unless the company gets equity infusion. Their stance got tougher after the recent announcement by their promoter. Dr.Vijay Mallya, who is known for his swanky lifestyle, said that he would infuse £50 million (around Rs.4.4 billion) into his Formula One racing team – Sahara Force India.
But seeing that Kingfisher has to be given up eventually, the question remains on how it should be valued by any acquirer. To be fair, it was a honest attempt at creating a new aviation experience and a uniquely premium airline brand for the discerning flier. However, the financial situation is a huge deterrent for any investor, even if he values the power of the Kingfisher brand. Sudip Bandopadhyay, MD & CEO, Destimony Securities, remains cautious when he says, “It is extremely difficult to put a scientific basis for a valuation of Kingfisher Airlines at this stage, since they have lost most of their rights and businesses. However, based on the strength of the brand, earlier track record and assuming that the flying rights can be gained back, we can look at a valuation around Rs.25 billion for a transaction involving controlling stake.” However, in the absence of any physical assets, flying rights and evaluation methodology the figure of Rs.25 billion also looks too good to be achieved, just in case the top management of the group plans to finally move ahead with such a stake sale. One of the major lifelines they would be looking forward to is the expected government clearance for further opening up of the aviation sector for foreign investment. If things go on as expected, this could be the best exit option for the ailing airline. However, for this to happen, Kingfisher Airlines needs to first regain its flying rights and revamp its distorted image. Brand equity has reached new lows due to the company’s persistent inability to pay salaries on time. As on November 17, employees had just started receiving their salaries for the month of May after repeatedly failed promises.
It seems sensible to infuse the cash back into the flagship company. Outside of the deal with Diageo, though, United Spirits has few other deleveraging options; such as selling shares worth around Rs.4 billion in its sister concern United Breweries, besides offloading stake in Bangalore Royal Challengers, its IPL team. In an attempt to unlock the value of its non-core assets, the group is said to be mulling over a proposal by private equity fund Blackstone to buy out the prime office, retail & real estate blocks in its flagship UB City for Rs.5.5 billion (at the time of this issue going to print). Over the last one year, the group’s other major business has also turned loss making. Mangalore Chemicals and Fertilizers, which earned a net profit of Rs.29.7 billion for Q1, FY 2011-12, posted a net loss of $12.49 billion for the corresponding period this year, owing to financing costs that rose by almost 400%.
Aviation is clearly the next business to bail out of. Kingfisher Airlines’ debt position has turned from bad to worse since it acquired debt-laden low cost carrier Deccan Aviation. At the time of the deal, the combined losses of the two entities amounted to around Rs.20 billion. This became the starting point for the entire disaster. The situation turned so bad that Kingfisher Airlines has even lost its flying rights due to non-payment of various dues. Its lenders have refused to provide any further assistance unless the company gets equity infusion. Their stance got tougher after the recent announcement by their promoter. Dr.Vijay Mallya, who is known for his swanky lifestyle, said that he would infuse £50 million (around Rs.4.4 billion) into his Formula One racing team – Sahara Force India.
But seeing that Kingfisher has to be given up eventually, the question remains on how it should be valued by any acquirer. To be fair, it was a honest attempt at creating a new aviation experience and a uniquely premium airline brand for the discerning flier. However, the financial situation is a huge deterrent for any investor, even if he values the power of the Kingfisher brand. Sudip Bandopadhyay, MD & CEO, Destimony Securities, remains cautious when he says, “It is extremely difficult to put a scientific basis for a valuation of Kingfisher Airlines at this stage, since they have lost most of their rights and businesses. However, based on the strength of the brand, earlier track record and assuming that the flying rights can be gained back, we can look at a valuation around Rs.25 billion for a transaction involving controlling stake.” However, in the absence of any physical assets, flying rights and evaluation methodology the figure of Rs.25 billion also looks too good to be achieved, just in case the top management of the group plans to finally move ahead with such a stake sale. One of the major lifelines they would be looking forward to is the expected government clearance for further opening up of the aviation sector for foreign investment. If things go on as expected, this could be the best exit option for the ailing airline. However, for this to happen, Kingfisher Airlines needs to first regain its flying rights and revamp its distorted image. Brand equity has reached new lows due to the company’s persistent inability to pay salaries on time. As on November 17, employees had just started receiving their salaries for the month of May after repeatedly failed promises.
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