BREAKINGVIEWS - Diageo's India splash won't get Kingfisher flying

SINGAPORE Mon Nov 12, 2012 11:50am IST

Customers stand at a Kingfisher Airlines reservation office at the domestic airport in Mumbai, February 16, 2012. REUTERS/Vivek Prakash/Files

Customers stand at a Kingfisher Airlines reservation office at the domestic airport in Mumbai, February 16, 2012.

Credit: Reuters/Vivek Prakash/Files

Stocks

   

SINGAPORE (Reuters Breakingviews) - Diageo's (DGE.L) $2.1 billion acquisition of United Spirits(UNSP.NS) has helped India's largest liquor company and its chairman Vijay Mallya. But hopes that Kingfisher Airlines will fly again simply because the grounded carrier's flamboyant founder has raised some cash look overoptimistic.

The Diageo deal gives Mallya some much-needed cash. Selling a near-13 percent stake in United Spirits will bring in close to $450 million, according to Breakingviews calculations. True, most of the shares have been pledged as security for loans. But those were agreed when United Spirits was trading at about half the 1440 rupees per share that Diageo has agreed to pay. Assume that the banks applied a haircut to the share price at the time, and it's possible that Mallya will get to keep about $300 million from the deal - even after repaying the loans.

However, this alone will not save Kingfisher, which has accumulated losses of $1.3 billion and has not flown since early October. The immediate hurdle is Kingfisher's operational licence, which is currently suspended and expires on December 31, unless the government extends it. Potential strategic investors, including overseas carriers that have recently been allowed by the government to invest in local airlines, could commit funds subject to the carrier's licence being restored and renewed. But they would also want state-owned creditors to agree to restructure Kingfisher's $1 billion of long-term debt.

That presents a second problem: One round of debt restructuring took place in March last year, but it wasn't sufficient. Creditors may be open to further concessions since they wouldn't recover anything much if the airline shuts down. But the lenders first want a $1 billion equity infusion, and they want some of it to occur immediately.

The third and the biggest hurdle to reviving Kingfisher is government policy. Fuel taxes are irrationally high and Air India's ticket prices ridiculously low. With assured access to taxpayer-funded bailouts, the state-owned carrier keeps private airlines gasping for profits. It will take a particularly brave knight to ride to Kingfisher - and Mallya's - rescue.

CONTEXT NEWS

- Tycoon Vijay Mallya has played down any link between plans to revive Kingfisher Airlines, his grounded carrier, and his decision to sell a controlling stake in India's largest liquor company, United Spirits, to Diageo.

- "We are working towards a comprehensive rehabilitation plan including recapitalization of the airline," Mallya told reporters on November 9. "It would be unfortunate if you would try to link this transaction with the airline."

- Kingfisher's share price rose 4.7 percent on November 9.

- Diageo announcement: link.reuters.com/kes83t

(Editing by Peter Thal Larsen and Katrina Hamlin)

(The author is a Reuters Breakingviews columnist. The opinions expressed are his own)

Reuters Showcase

FMC-SEBI Merger

FMC-SEBI Merger

Regulatory shakeup could revive commodities markets   Full Article 

Market Eye

Market Eye

Sensex, Nifty end higher after bumpy budget-day trading  Full Article 

Tax Incentives

Tax Incentives

Budget woos foreign investors  Full Article 

Excise Duty

Excise Duty

Cigarette makers fall after budget hikes excise duty  Full Article 

Welcoming the Budget

Welcoming the Budget

India Inc cheers corporate tax cut, simpler rules  Full Article 

Gold Price

Gold Price

Gold prices to rise after budget keeps import duty high  Full Article 

Fuel Prices

Fuel Prices

IOC to raise diesel, petrol prices from Sunday  Full Article 

Moody's on Budget

Moody's on Budget

Budget "credit neutral" from a ratings perspective - Moody's   Full Article 

Reuters India Mobile

Reuters India Mobile

Get the latest news on the go. Visit Reuters India on your mobile device  Full Coverage