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Open to Diageo board representation in USL: Mallya

Published on Fri, Feb 13, 2009 at 10:47 | Source : CNBC-TV18

Updated at Sat, Feb 14, 2009 at 12:39

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Vijay Mallya, Chairman, UB Group, said contrary to media reports, the United Spirits and Diageo "was not stuck". Both the players have spent a lot of time, money and effort in working out the deal, Mallya said. "However, there are various Indian regulatory issues that need to be worked out. Diageo too - given the fact that it is a huge global player - attracts monopoly, anti-trust issues. All of those need to be worked out."

The deal, Mallya said, was not stuck on the quantum of shareholding. When asked if he was open to Diageo picking up more than 15% stake that would require he make an open offer to the public and was he okay with a board representation for it, Mallya said, "I'm open to it. I did it in United Breweries during the deal with Scottish and New Castle. It has more than 15% stake and board representation. So if Diageo wants that, we can work it out."

Here is a verbatim transcript of the exclusive interview with Vijay Mallya on CNBC-TV18. Also see the accompanying video.

Q: Diageo's specific line was that mutually agreeable terms have not yet arrived at, could you just elaborate on where the talks are getting stuck, is it on the price or is it on the quantum of the sale, where is the deal not moving ahead?

A: There is no question of the deal being stuck on any issue, as Paul Walsh summed it up yesterday in saying that media reports on about its talks with United Spirits have jumped ahead of themselves. I think that's a very fair statement, the media has been focusing on the progress of this potential transaction for quite some time. As a public company Diageo cannot issue any definitive statement on whether a transaction will go through or not and indeed that's the case with United Spirits as well because this would be price sensitive information.

Both Diageo as well as United Spirits have spent a lot of time, energy, effort, money and have hired the best advisors because there is mutual interest in doing a deal. This is complicated, there are Indian regulatory issues that are to be addressed and complied with and then there are also the cases where Diageo as world's largest spirits company obviously attracts anti-trust or monopoly issues worldwide. Their stake in United Spirits could also impact United Spirit's own ability to trade overseas in certain sectors. So these are the issues that have to be worked through very carefully and these things take time. We are not stuck on the quantum of share holding because as I have said that anybody can invest in United Spirits up to the promoter share holding level and I have confirmed this before. As far as price is concerned, a strategic investor knows how strong United Spirits really is, with a huge market share in India and with huge growth continuing. As we speak. January it self had a 26% sales growth. A strategic investor won't only look at the stock market but is going to look at the intrinsic strength of the company going forward.

Q: The specific quote though by Diageo does say that these discussions have not yet identified a structure which is acceptable to both parties, how would you construe that and what exactly is the problem with the structure as they see it or you see it?

A: I don't want to interpret Diageo's statement and try and analyze it here. Suffice it to say that if they had a 14.9% stake, their influence and control over USL would be perceived differently and have a different impact on anti-trust issues than if Diageo had upto 35%. So it is really that issue. It is not something that I should dissect and try to determine - or I would respectfully suggest that you should not try and determine what exactly they meant. Suffice it to say there are many issues both with international ramifications as well as domestic ramifications that have to be very carefully worked through and that is in progress and both sides are investing considerable amount of time to see how we can move forward. But constant speculation on this issue will prompt such reactions.

Q: Those points are taken on board and the issues that you are talking about the ramifications and anti-trust too are taken on board. The question is as the promoter of United Spirits are you open to give Diageo more than a 15% stake which would require an open offer to the public whether it is 26% or 35% which will give them powers that you just spoke about. As a promoter would you be open to that possibility?

A: Absolutely and I have already done it with United Breweries. I brought in Scottish & Newcastle and they made a public offer so I have already done it before and I don't see why I should have a problem with that now.

Q: Are you also open to some management changes in the current board because we understand that Diageo might be keen on board representation as well along with whatever percentage stake is finally struck at?

A: Scottish & Newcastle have two directors on the board of United Breweries and if Diageo wants board representation - I am not going to stand in the way.

Q: That is the direction in which the deal is heading that Diageo wants a strategic role to play in United Spirits? Is that the nitty-gritty that you are hammering out with them, this will not be just a 14-sub15% kind of a financial investment?

A: I cannot comment on that because the fact is that it is a joint call depending on the Indian regulations as well as the international regulations and consequential effects. But as I have said if they want to go beyond 15%, I have no problem with that at all.

Q: That's exactly what I was asking because the earlier impression what people had was that, USL in this transaction is trying to monetize its treasury stock to alleviate some of the strain on its balance sheet but now you are saying that this could be a much bigger strategic deal that you are talking about?

A: I would agree with you that it started to my intent to monetize the treasury stock which I have already said that I was going to do. But if Diageo wanted a high stake because of they obviously have faith in USL in the Indian market which perhaps will become the largest single scotch market in the world, then I have no problem with that at all. They are world class partners with world class brands as well.

Q: Is the plan of divesting about 49% in White and Mackeys still on for United Spirits?

A: That obviously is a part of the overall discussion, so yes with or without Diageo that is something that is very much on my agenda because I have confirmed that in six months I will deleverage USL and that is certainly one of the options before me.

Q: While we expect you to give us a final date on when this gets tied up and if it does, give us a sense of where you are in the timeline of achieving closure, by the end of this financial year. Do you think a final decision either way will be taken by Diageo and you?

A: I really can't speculate on that it would be unfair for me because two hands have to clap and not one. Diageo have to go through their own processes and we have to go through ours. It wont be appropriate for me to put a timeline to this. Nobody wants to continue to devote time and attention and pay fees for an indefinite period of time.

Q: Can you comment on what has happened in the airline or airfare business over the last couple of days; first those airfare cuts then apparently airfare hikes and then the Aviation Minister stepping in to curb that and saying you got to roll it back, did Kingfisher think of raising airfares to begin with and if yes is it prepare to roll it back now?

A: I think that this is a bit of a misunderstood issue. Yes it is a fact that we all tried some aggressive pricing during January to stimulate demand in response to the Civil Aviation Minister's call to reduce airfares, it didn't work because the passenger traffic did not get stimulated, load factor did not go up and so I decided without talking to anybody else that we would just go back to the December levels.

However this does not mean that we don't offer cheap airfares anymore. I think all airlines - if people check their websites - offer Re 1 fare provided you book 30 days out and those options are still available to the traveling public. So it is not correct to say that there has been a sort of a cartel like fare hike by all airlines when we are all aggressively fighting for a share of that shrinking pie.

Q: So are you going back to your January fares or these higher fares are likely to stay, with those Re 1 tickets booked advanced etc but are you essentially going back to the December fares?

A: Absolutely yes because I achieved a particular load factor in December with particular load revenue to the company. In January, we succeeded in doing with maintaining the same load factor. Having lower revenue which is obviously not a sensible way of doing business and so we are back to the December levels. But we also offer very cheap fares 30 days out. But the closer to the date of travel, the more expensive travel becomes which is something practiced world wide. This isn't something that was invented by me or by airlines in India and so yes Kingfisher is focused on revenue. We want to make sure that we generate maximum revenue from our fleet.

Q: Has Kingfisher airlines approached the Civil Aviation Ministry or the Minister detailing the problem because this morning there are also reports that the Monopolies and Restrictive Trade Practices Commission (MRTPC) is demanding a probe in to what they said of almost a cartelization and odd synchronicity in all the airlines announcing their fare hikes?

A: Late yesterday we have received a letter from the Directorate General of Civil Aviation (DGCA) asking details about the fare hike which we shall reply. We are completely open; they can come in and take a look at what we do and how we do things. We have no problem in submitting a comprehensive reply to the DGCA.

As far as the MRTPC's investigation is concerned, when we announced our alliance with Jet Airways, they said that they are going to probe, now again they are going to probe, we have nothing to hide. We are willing to be completely transparent and share with them the reasons behind our pricing policies. I think it needs to be understood that we need to find a positive route to profit, we cannot do a public service and incur high cost on one hand including high sales tax on fuel, the dollar has appreciated vis-�-vis the rupee, our cost have gone up for airplanes. So people have to recognize cost and revenue and there is a very definite correlation between the two. So if government helps us to bring down costs by reducing taxes and charges, we will reduce the fares. But if government is unable to help the industry then airlines have to generate enough revenue to cover their cost.

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