Diageo deal could pull Kingfisher from the brink

MUMBAI/NEW DELHI Wed Nov 14, 2012 6:21pm IST

1 of 2. Passengers stand at a Kingfisher Airlines reservation office at the domestic airport in Kolkata February 21, 2012.

Credit: Reuters/Rupak De Chowdhuri/Files

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MUMBAI/NEW DELHI (Reuters) - Liquor baron Vijay Mallya's $2.1 billion deal to sell a stake in United Spirits(UNSP.NS) could throw a lifeline to his grounded Kingfisher Airlines(KING.NS), although pulling the carrier back from the brink will not be easy.

The flamboyant "King of Good Times" is keeping his plans to himself for now. However, his decision to give up control of his group's flagship company as Kingfisher heads towards the point of no return suggests that he is unwilling to write off his airline business, bankers and industry analysts say.

The proceeds from Mallya's deal with Diageo Plc (DGE.L) will not be enough in themselves to rescue the ailing airline, which has failed so far to find fresh investment to prop it up or a global carrier willing to play white knight.

It could still give him enough to make a piecemeal payment to his creditors and draw them back to the negotiating table for fresh loans and another restructuring of the airline's debt.

"The deal has surely changed the mood of Kingfisher lenders and investors from absolute despair to some hope," said a senior investment banker with a European bank in Mumbai, declining to be identified as he was not authorised to speak to the media.

"Kingfisher is a liquidity issue and if he is able to inject some liquidity that will get banks to open the lines again, he will definitely do that," the investment banker said. "He wouldn't have sold his flagship firm now without a turnaround plan for Kingfisher."

Indeed, shares in Kingfisher have gained nearly 15 percent in three sessions since the United Spirits deal was announced on November 9.

If Mallya is planning to use the liquor deal to rescue his airline, he will need to act quickly.

Kingfisher needs to raise or commit at least $1 billion by November 30, according to the State Bank of India, the leader of a 17-bank consortium that has lent about $1.4 billion to the carrier. The consultancy Centre for Asia Pacific Aviation says Kingfisher's total debt is about $2.5 billion.

"Kingfisher Airlines needs a significant cash infusion if it is to be revived," said Amber Dubey, head of aviation at KPMG. "Diversion of some funds from the United Spirits deal may be a good first step."

However, he said the airline would need more funds to continue operations on a sustainable basis, he said.

Diageo agreed to buy a majority stake in United Spirits for $2.1 billion after months of talks, fuelling a push by the world's biggest spirits group into fast-growing markets.

United Spirits and Mallya's group company United Breweries Holdings (UBHL.NS) will get about half of the sum. Sources said the bulk of this will be used to pare United Spirits' debt and release its shares, which were pledged by its founders to raise loans.

Mallya may infuse some of the proceeds into Kingfisher to pay staff salaries, airport fees and fuel bills to make it airworthy again, said investment banking sources and analysts.

A Kingfisher spokesman did not respond to a request for comments.

RETURN SOME MONEY

Mallya, known for his lavish lifestyle and often referred to as India's Richard Branson, last week played down any link between the United Spirits deal and problems at his airline.

Kingfisher, which Mallya launched with much fanfare in 2005, was once India's second-largest airline by domestic market share. For most of this year, the carrier has struggled to pay its staff, and it has not flown since early October due to protests and safety concerns.

In the event of Kingfisher's demise, its creditors would hardly get anything back as India does not have a formal bankruptcy process. Analysts say they may be willing to find some middle ground, lured by the prospect of getting at least some of their money back after the airline resumes flying.

Lenders will meet with company senior executives later this month to discuss a turnaround plan, banking sources said.

"When we see money in their hands we can always ask them to return some to us," a senior official with a state-run bank and one of Kingfisher lenders told Reuters, declining to say whether the bank would commit more money to the carrier.

Any decision to lend more to Kingfisher would be based on a fresh infusion of equity from its founders and a "credible plan" to revive the airline, State Bank of India's Chairman Pratip Chaudhuri said last week.

Few doubt Mallya's capacity to pull off another surprise, bringing in an investor to rescue the airline. He told Reuters last month that two investment bankers had been hired as part of a search for potential partners.

"The timing of Mallya's deal with Diaego does show some intent on Mallya's part to get the airline going," said Rajan Mehra, the India head of U.S.-based private jet operator Universal Aviation, and an aviation expert.

"And if some Middle East airline decides to put its muscle behind him, with all their financial strength, expertise in running successful airline models and deep interest in the Indian market, well, it's anybody's guess."

But time is not on Mallya's side: the government has warned that it will not renew Kingfisher's licence if it fails to provide a turnaround plan by the end of December. (Additional reporting by Swati Pandey in MUMBAI; Editing by John Chalmers and Ryan Woo)

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