Vijay Mallya appears to have chosen Whyte & Mackay (W&M), one of his most cherished acquisitions, for reducing the gearing of his flagship company, United Spirits Ltd (USL). Mallya had bought the pedigree scotch major, based in Scotland, for $1.2 billion in 2007.
According to senior management officials of his UB Group, USL is working aggressively on reducing its stake in W&M, as its planned Foreign Currency Convertible Bond (FCCB) issue of $225 million would hardly suffice to reduce the company’s leverage of 1.7 times.
A group official said: “While the FCCB will give us only minor elbow room, a stake sale in W&M will give us resources to reduce the debt burden to a large extent. The group is making serious efforts towards this.” The management of USL did not respond to questions on this move.
USL sells 112 million cases (nine litres to a case) a year and is reeling under close to Rs 8,000 crore of debt, mainly because of the highly leveraged acquisition of W&M. While volumes are good, with USL controlling 55 per cent of the spirits market in India, the cost at which this growth has come is being scrutinised. Of the total debt, close to Rs 2,000 crore was piled on during the first nine months of 2011-12, resulting in interest outflow spiking by 34 per cent annually.
In the past two years, USL raised Rs 2,800 crore through treasury stock sale, qualified institutional placement and re-financing of foreign currency loans to pare interest costs. Still, these have not been sufficient. W&M itself has been slow in delivering numbers, especially after a change in strategy to exit the white label business.
When USL acquired W&M in 2007, global spirits major Diageo was a major client of W&M for its scotch supplies. A few months after the deal, the contract came to an end and Diageo stopped taking supplies, denting major revenues. Mallya resorted to a strategy of totally stopping bulk sales.
“The strategy is a good one, but it’s a long haul. While W&M indeed has iconic brands, building total revenues from brands is going to be an uphill task and till then, the operating margins from W&M are expected to be under severe stress,” another industry analyst told Business Standard. While the Ebitda margin at W&M was down at 21.8 per cent, net debt rose 23 per cent to £138 million (Rs 1,060 crore).
In addition to FCCBs and stake sale in W&M, there are a few other options for USL to deleverage. It holds treasury stock worth Rs 800 crore and 8.5 million shares of United Breweries, worth another Rs 350 crore. And, USL also owns the Royal Challengers Bangalore cricket team in the IPL, the valuation of which is understood to be in the range of $350 million.