Mallya does a deal…

Vijay Mallya has stepped down as non-executive chairman of United Spirits Ltd, the India spirits company that is controlled by Diageo Plc, after striking a deal with the firm to drop all allegations of financial irregularities and pay him $75 million over five years.

As part of the agreement, Diageo has extended Smirnoff’s sponsorship of the Force India Formula 1 team of which Mallya is team principal and part-owner for the next five seasons, at an estimated cost of $15 million per season. In exchange Mallya has agreed a non-compete arrangement with Diageo.

Mahendra Kumar Sharma, currently a non-executive director of United Spirits Ltd will now become the chairman.

Though some may see this as a victory, it should be remembered that USL was once the star company in the crumbling Mallya empire. Mallya still holds four percent of the firm but may have to give that up as creditors continue to chase him for money related to the defunct Kingfisher Airlines. Diageo had agreed to the deal to get Mallya out of the way so that the firm can concentrate on making money in India.

What is not clear from the statements made by the two parties is where this leaves $135 million that Mallya owes Diageo for a loan to Watson Ltd, the company that holds Mallya’s shares (42.5 percent) in Orange India Holdings, the holding company of the Formula 1 team. Diageo Holdings Netherlands BV issued a guarantee to Standard Chartered Bank for the $135 million loan to Watson. The money was then used to pay another bank. Diageo received a counter-indemnity from Mallya, agreeing to repay Standard Chartered and if Mallya defaulted, Diageo could then seek to recover the money from him. Diageo was forced to pay the money at the end of January. The Standard Chartered loan was granted on a guarantee of shares in the Force India team, but Diageo has filed paperwork saying that the stake has lost so much of its value that it might not be able to recover the money. It could try to get the money from shares pledged by United Breweries, Mallya’s main remaining company, but a consortium of Indian banks has already obtained an order from the Karnataka High Court preventing the sale of these shares because they want them.

It could be that the Diageo will continue to go after ownership of the team, despite its lack of any book value as a rebuilt team could be worth a great deal more. The team’s other main shareholder, Roy Subrata Sahara, is currently in jail in India and says that he wants to sell his shares in Orange India Holdings, but it is believed that Mallya has the first right to buy Sahara’s 42.5 percent stake. He cannot afford it and it is unlikely that Diageo will invest more. It is not clear what would happen to Mallya’s first rights claim if Diageo was to take over his Orange India shareholding.

Diageo had a plan a few months ago to take control of the team, in league with Aston Martin, and rebuild the operation as Aston Martin Racing, with Diageo sponsorship and thus use the sport to sell more cars and vodka. Aston Martin does not appear to have the money to take such a step.