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Kingfisher Airlines' lenders complicate Diageo deal; may sell pledged United Spirits' shares

Sangita Mehta & Baiju Kalesh, ET Bureau Mar 6, 2013, 08.36AM IST
(Top lenders from PSU banks…)

MUMBAI: Lenders to Kingfisher Airlines have indicated they may sell United Spirits (USL) shares pledged with them as collateral either in the market or at a higher price to outsiders, dealing a serious, but not fatal, blow to the proposed takeover of USL by British liquor giant Diageo.

Top lenders from PSU banks told ET that they have lost faith in Vijay Mallya, and don't believe he is going to revive the airline. "We are open to selling the shares to anyone who gives us the best price," a senior official with one of the PSU banks said. "It should be a transparent deal," he added. Two per cent of United Spirits shares were given as collateral to the State Bank of India-led consortium a few years ago when Kingfisher Airlines borrowed money to continue operations. The lenders want their money back, but Mallya has been unable to come up with a satisfactory revival plan for the airline. It is common for lenders to take shares of group companies as collateral. When the loan becomes bad, they have the option of selling the shares in the market to recover their money.

"'Legally, the lenders can sell the shares if there is a default by the borrower," says Rohit Berry, an investment banker at BMR Advisors, an audit and consulting firm. "If there is no other way, that will be the last resort."

The lenders' stance now poses an unexpected complication for Diageo and Mallya, who have received most of the clearances for the transaction and are on the verge of launching the open offer. If the lenders don't release the 2% stake for sale to Diageo, Mallya and the UB Group will be forced to find extra shares in order to complete the deal. In normal circumstances that shouldn't be difficult, but in this case nearly 98% of the promoter stake of 27.5% in USL is pledged.

Diageo may also not find it easy to buy the extra shares in the market without pushing up its cost of acquisition. The Indian market regulator's takeover rules allow an acquirer to buy shares of the target company after announcement of the open offer on the condition that it offers the same price to all shareholders. Diageo can buy the remaining 2% in the market, but will have to pay a higher price and revise the open offer price. The preferential allotment at Rs 1,440 per share, which has already been approved by the board and the shareholders, will also have to be revised.

The SBI-led consortium holds 2% of USL shares as collateral for loans given to the bankrupt Kingfisher Airlines. The shares are a part of the promoter holding of USL, which Mallya agreed to transfer to Diageo last November. Diageo and the UB Group struck a deal under which the British drinks giant will buy 19.3% from the promoter group companies of USL and treasury stock and make a preferential offer for another 10%.

People close to the situation say there is little danger of the deal collapsing as the UB Group will find a way to persuade the banks to release the collateral. The banks want assurance that their money will be repaid. The official declined to talk about how they will proceed with the sale if the situation worsens. Technically, it is difficult for a third party or a hostile bid to emerge in this situation. Few investors would want to take on both Diageo and Mallya and a 2% stake is too insignificant to make a difference. Also, the deal can be consummated if Mallya and the UB Group replace the shares with the lenders with shares released through revocation of other pledges.

Prakash Mirpuri, spokesperson for the UB Group, told ET over phone that the group had no comments to offer on the story.

Â  Billionaire Mallya borrowed money to invest in Kingfisher Airlines, which was grounded after it failed to repay aircraft lessors, fuel suppliers and employees. The airline has lost its licence to fly, and its international flying rights have been taken away. Its slots at various airports are on the verge of being sold to rivals such as Jet Airways. SBI is the largest and the lead lender of a consortium of banks to Kingfisher. The airline owes Rs 1,822 crore to SBI and Rs 7,723 crore to the consortium of bankers.

Lenders have a precedent of selling shares in companies where promoters have defaulted on their loan. In 2010, banks led by IDBI Bank sold a majority stake in Ispat Industries, owned by the two younger brothers of LN Mittal, to rival JSW Steel owned by Sajjan Jindal. They have also resorted to a change in management in retail chain Vishal Retail after the company failed to repay loans.

"I don't think, the share sale by lenders will hamper the deal as Diageo must have taken protection rights from Mallya for the percentage of shares they should own in the company," says a managing director of a global investment bank.

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