#125 The Hangover (Pt. 4) – Diageo in India

In 2012, media such as Forbes reported on a landmark deal between the world’s largest maker of spirits, British company Diageo, and India’s “King of Good Times”, Vijay Mallya. For over $3 billion (and a few other incentives including sponsorships for Mr. Mallya’s formula one racing team), Diageo acquired a 55% stake in Mallya’s United Spirits Ltd. (UCL), which had more than 50% of market share in India. It seemed to be a match made in heaven, and certainly a dream come true for Diageo, which had launched an unsuccessful wine business in India in 2006 that it shut down again after only three years, and that had also formed an earlier, failed joint venture with the country’s second-biggest liquor firm, which found its end in 2011. And it was a dream come true for Mr. Mallya, too. The glitzy entrepreneur’s ornate conglomerate at whose heart is Kingfisher Airlines, had run into financial difficulties and desperately needed the cash infusion. Not only had he personally slipped 24 notches in the Forbes Asia rankings of wealthiest people – from No.49 in 2011 to No.74 in 2012 – but he also struggled to keep his businesses afloat. When the deal closed in 2013, things still looked peachy nonetheless, at least for Diageo. The deal provided them with access to a market with an increasing thirst for alcohol, but also with sourcing, bottling, and distribution infrastructure as well as network relationships. The deal made India the second-largest market for Diageo’s brands, which include Johnnie Walker whisky and Smirnoff vodka. But soon thereafter, things deteriorated.

Although Diageo had been aware of their new partner’s financial challenges – which were the drivers behind the deal in the first place – the company was in for some surprises. Or, at least, they say so. Diageo discovered that companies within Mallya’s empire were “intricately, and confusingly intertwined” (as the Wall Street Journal has put it). Funds in the millions had been diverted from some companies to others – mainly to Kingfisher to cover rising fuel costs and deal with mounting debt – with little record or prospect to be repaid. Initially, Diageo claimed not to have known of any of this, and only learned of the irregularities after forensic audits by PwC and Ernst & Young. But as it surfaced recently, even the then COO of Diageo (and later CEO), Ivan Menezes, had knowledge very early in the beginning, as the Indian Economic Times reported. In addition, there seem to have been several cases of bribes paid to Indian politicians in various regions in order to provide UCL with favorable treatment, all recorded in a handwritten ledger that Mr. Mallya shared with Diageo executives, as the Business Standard writes. Meanwhile, Diageo cut ties with Mr. Mallya in 2016 who left India for London amid criminal investigations of unpaid debts, possible money laundering and tax evasion. A parting gift of a $75 million severance package must have sweetened Mr. Mallya’s departure. Investigations continue in India and in Britain, and extradition proceedings are under way.

Asking the “Why” question has become very popular in recent years. I can’t help but asking “why” in this case, too. Why was Mr. Mallya behaving the way he did? Was it just the immediate pressure of mounting debt, or was there more in the external environment that may even be typical for doing business in India? Especially considering that other Western companies face similar challenges in India. British Petroleum (BP) was fined $1.55 billion in connection with a gas-drilling joint venture in India. Vodafone received a $2.2 billion tax bill when India changed its tax laws in 2012 – after the company had acquired India’s largest telecommunications company for $16.4 billion. Daichi Sankyo saw its acquisition of a majority position in Indian Ranbaxy Laboratories at stake when the latter agreed to pay a hefty fine of $500 million in the United States – shortly after the deal had closed, of course. And why did Diageo choose to ignore what they seem to have known from the beginning, but then take Mr. Mallya to court much later? Lots of material to think about and to discuss here.

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