Still frothing - continue the Cheers !

I had written about UB earlier in Sept. here. 

With SBI finally tagging Vijay Mallya as a wilful defaulter, the Mallya saga has now entered a new phase. It remains to be seen how the story unfolds now.

At the centre of this story would be Mallya’s 34.04% stake in United Breweries (UB), valued at nearly Rs. 8,500 crore, but 15.57% of this stake is pledged. Mallya owes more than Rs. 7000 crore to his 17 lenders, most of them state-run banks. One can’t be so sure how long the tag will remain on Mallya, since the liquor baron can still file a review petition in the apex court. Sometime towards the middle of last year, Kolkata-based United bank of India first declared Mallya as a wilful defaulter. But, that tag stayed only until December, when Mallya’s lawyers challenged the bank’s action on technical grounds. A similar thing could also happen now, unless Mallya throws in the towel.

One good thing about SBI's move is that it may prompt the other more than a dozen banks in the consortium too to clamp down on Mallya now since most of them have been waiting for cues from the country's largest lender. Mallya has not so far showed his willingness to repay but has chosen to confront the creditors in courts. 

But ongoing fund requirements to run his other businesses, or whatever remains of them, will surely require Mallya  to rethink his options, one of which may be to get completely out of UB as he did with United Spirit (US). This assumes significance because at a recent effort by banks to auction some of the Kingfisher assets, the reserve price of these assets was set at just Rs 65 lakh. This means chances are that banks will recover only a minuscule fraction of their several thousand crores of dues even if they manage to sell these assets. So Mallya’s 32.62% stake in United Breweries (UB), valued at Rs. 8,500 crore would be critical from the lenders’ point of view if they have to have any hope of recovering their dues in any significant way.

Recently, post SBI’s willful defaulter tag, Yes Bank sold 3.02% shares of UB pledged to it by another of Mallya’s companies – McDowell Holdings, for Rs. 778 cr. In the week before this sale, Yes Bank had again sold 4.25 lakh shares of UB, amounting to 0.15% stake, for Rs 39.48 crore through an open market transaction. These shares were purchased by Heineken which increased it’s nearly 42% stake marginally. In recent times, Heineken has not let go of any opportunity of mopping up UB shares from the market, when they have been available. All this is towards taking its stake to more than 51% and gaining majority control of UB when it can call the shots on its operations. Once the majority stake is acquired indirectly by making open market purchases, Heineken will have to make an open offer to the remaining shareholders as per SEBI rules. And we have all seen what happens to the shares of companies the moment open offer news is out, or even when there is any inkling of such news. All rationality is lost and the valuations become meaningless. And if Heineken is serious about gaining a controlling stake, it will have to pay a significant premium to the market price of UB which would have already hit the roof on the news.

So hold on to UB if u have it, and buy it f u don’t. Either way, there are gains to be made. The only question is of patience and perseverance. I believe it is a question of when and not if.