Search the Internet          Tips  Sites: Finance, Investment

UB to offload 26% to strategic foreign partner

Fakir Chand in Bangalore

Liquor baron and United Breweries flamboyant chairman Vijay Mallya is bracing up to compete with global brands on his home turf as well as in the international markets by roping in a foreign partner with 26 per cent strategic investment in his listed company.

Announcing the company board's decision at the 85th annual general meeting in Bangalore on Saturday, Mallya told shareholders that as many as 10 foreign brewery companies, including South African Breweries, Carlsberg Scottish and Newcastle of the UK have evinced interest in buying out a strategic stake in the company.

"We have already appointed Kotak Mahindra Credit Capital and Goldman Sachs as advisors to undertake the dilution process after due diligence of the company's various parameters such as its brand value, market share and other financial factors such as assets/reserves," Mallya disclosed.

Stating that the process would be completed by the end of the current fiscal year, Mallya informed the shareholders that the divestment process would be taken up only after the company's proposed de-merger was gone through in the next couple of months to split United Breweries into a brewing company and an investment company. IL&FS is the lead advisor.

"The off-loading of 26 per cent equity stake to a foreign partner will be restricted to the brewing company while the investment company will be functioning independently to pursue long-term interests such as developing real estate and acquisitions in UB's core or strategic areas," Mallya asserted.

Alarmed over the entry of international players like Fosters and SAB in the Indian brewery industry either through the foreign direct investment or acquisition route, Mallya went into over-drive during the preceding fiscal year to make a flurry of acquisitions for expanding UB's production capacities and consolidate its market share across the country. Both (production and sales) command over 50 per cent of the country's beverage market.

"The company has invested a whopping Rs 860 million during the year under review at the AGM to acquire brands and brewing capacities in northern region (Inertia Industries Ltd in Haryana), in the western region (Associated Breweries & Distilleries Ltd with its popular brand London Pilsner in Bombay, and a modern brewery in Aurangabad with its brand Sandpiper beer), and in the southern region (Mangalore Breweries & Distilleries Ltd),"

It may be recalled that in the recent past, South African Breweries (SAB) has invaded Mallya's liquor bastion by acquiring a majority stake in the Bangalore-based Mysore Breweries Ltd to give a tough competition with its celebrity brand Knockout to market leader Kingfisher of UB.

"UB's gameplan is to not only take on the battle, being fought in the sub-continent, thanks to the government's liberal entry policy to foreign players into the domestic market, but also compete with their own brands in the international markets with the distribution and marketing strengths of our prospective foreign partner with global brands and presence," Mallya claimed.

The company's board will be meeting in Bombay next month to short list the prospective bidders and evaluate their offer for striking a right balance between their investment and our global marketing strategy as UB's flagship brand Kingfisher is sold in as many as 35 countries.

Shareholders, however, were not convinced of Mallya's line of argument for not only the de-merger of UB, but also the company's move to rope in a foreign partner as high-cost of borrowings had a direct impact on its bottomline and dividend payout for the year under review, which declined to 15 per cent from 20 per cent in the previous fiscal.

Though the company has registered a marginal growth in its sales turnover for the fiscal 2000-01 to post Rs 3.82 billion against Rs 3.75 billion during the previous year (1999-00), its net profit drastically fell to Rs 30 million from a high of Rs 110 million, netted last year.

In the absence of debenture redemption as during last year (1999-00) of Rs 61 million, the profit for appropriation for the year under review (2000-01) is at Rs 140.85 million against Rs 290.60 million during the corresponding period of last fiscal.

In response, Mallya said borrowings made during the fourth quarter of the fiscal year to finance strategic investments had resulted in higher expenditure by way of interest payments and overheads.

"Our purpose to rope in a foreign equity partner is to retire the debt raised to the tune of Rs 3.23 billion in the form of secured and unsecured loans from banks and financial institutions."

Commenting on the performance during the first five months of the current fiscal, Mallya said the hot beverage market was not affected by the ongoing economic slowdown across the country as "people continue to drink as much during `good times' as during `bad times'.

"There is a half the billion population out there waiting to say cheers to beer even at the entry level which is around 21 years for the hot beverage. I also do not foresee any problem for the brewing industry in the country on account of the recent terrorist attacks in the US and uncertainty in the region with war clouds looming large," Mallya affirmed.

UB's Kingfisher Lager continues to be the brew of choice with one out of every 4 beers consumed in the country being the former. Similarly, Kingfisher Strong and UB Ice are increasingly becoming popular with the young and the upwardly mobile.

"Growing urbanisation and exposure to international culture together with a demographic composition ensures a vast market to be tapped on a sustainable basis in the years to come. Hal of India's billion population is below 21 years," Mallya informed shareholders.

Money
Business News

Tell us what you think of this report