How Deccan boards Kingfisher biz class

Economic Times

It was in early May that Vijay Mallya decided to change the course of Indian aviation. He called Captain Gopinath, the founder and chairman of Air Deccan, and tried to make him an offer difficult to refuse.

Air Deccan’s back was on the wall: it had only a month’s cash left; it had defaulted on payments worth over Rs 200 crore to various partners like simulator providers, spare engines suppliers and maintenance firms. Time was running out, but not the Captain’s tenacity.

He refused the deal and said, “I am from Mars and he is from Venus.” He then shot off an e-mail to all Deccan employees requesting them to dismiss all speculation about any merger or alliance with Kingfisher. All of a sudden, the deal seemed to be over. There were gloomy faces at Vijay Mallya’s headquarters. At Deccan, the situation was desperate.

The company needed a partner quickly, raise some money so it could continue to fly. The offers from the Anil Dhirubhai Ambani Group (ADAG) and Texas Pacific Group (TPG) had their own share of problems. ADAG wanted majority control of 51%. Captain Gopinath rejected the idea outright: he simply didn’t want to give up control.

Also, he didn’t want to get swallowed in the ADAG apparatus where Deccan would be just another investment. TPG would bring in the money but offered no real synergies which Mallya’s Kingfisher provided. There were a few other private equity players in the fray as well.

“But picking up a stake in Air Deccan would have forced us to do an open offer. This would have increased the size of the deal and we were not ready for it,” said a senior executive from an airline who did not wish to be quoted. As the deal size got bigger, these financial investors fell off their bikes.

Edelweiss Capital, Deccan’s advisors then swung into action. The firm had done some work for Kingfisher in the past, and had some idea about its operations. A rapport also existed between senior Edelweiss and Kingfisher executives. Using their goodwill with the Mallya camp, they persuaded Mallya to adopt a different tack.

They pointed out the synergies between Deccan and Kingfisher and the benefits of consolidation in a industry reeling under severe cost and margin pressures. Mallya, meanwhile, was also thinking along similar lines. He realised that his first approach was too strong and had put Gopinath on the defensive. It had made Kingfisher look like a predator. The public statements about his interest in Deccan had only elicited a sarcastic response from Gopinath.

Another factor was also weighing on Mallya’s minds. If he failed, Deccan will have no option but to do a deal with any of the other investors. ADAG, with its money and muscle, would be a formidable competitor. Backed by the younger Ambani’s almost limitless fund-raising abilities, Deccan could continue playing the price warrior.

Dirt cheap tickets would be dumped in the market, further worsening the financial position of all airlines. Mallya decided to turn on the humility tap and let the charm flow. As he hopped across London, Glasgow, Monte Carlo and Paris, he resumed conversation with Gopinath. With the help of some advisors, Mallya worked on Gopinath.

He dropped all talk of acquisition, takeover or merger. He adopted the line of a friendly investor. He also refrained from public statements that would irk Gopinath or other investors. His team, meanwhile, was preparing the ground along with Edelweiss. They pitched the deal as an investment by UB Holdings, not Kingfisher Airlines.

This was crucial in order to persuade Gopinath that a more flamboyant rival is not taking over his company. It was a different Mallya who phoned Gopinath early last week. “Would you consider it if I come in as an investor?” he asked. “May be we can come in with minority stake and then raise our holding through an open offer,” he told the Captain.

As Gopinath began to understand Mallya’s proposition, the king of good times made his killer move. “You continue as the chairman. This is probably the first time in my life that I am sitting as a vice-chairman in any company I have been involved with,” Mallya is said to have told the Captain.

Gopinath liked the idea. The alternative, ADAG, was simply not acceptable to him. But there was something he needed to resolve. Air Deccan’s original backers, including Lachmandas Ladhani, who were believed to have opposed plans to sell stake to the UB group. Mr Ladhani, one of the original investors in Air Deccan, has a 11% holding in the company. He managed to carry the day taking with him Mr Ladhani as well as the financial investors, ICICI Ventures and Capital Partners.

While Mr Mallya may have been persuasive, there’s another man who wanted Captain to do the deal: Kiran Rao, the executive VP of Airbus. Considering that Air Deccan has placed an order for 62 A320 aircraft amounting to $2.4 billion, Airbus reportedly was concerned about the pre-delivery advance payments from the cash-strapped Air Deccan.

So, a meeting reportedly took place in Europe early this week between Mallya and Airbus officials. The final decision was taken in consultation with Airbus officials. With everything going for the deal, Captain Gopinath decided to give up the spartan efficiency of Air Deccan to board the Kingfisher business class. While the Air Deccan brand remains, and the two companies will operate “independently”, it is clear that the days of price warriors are over.

At the press conference to announce the deal in Mumbai on Friday, it was clear who the dominant partner was. The venue was flooded with Kingfisher colours of red and white, and the Kingfisher girls had been thrown in for more colour. With the exception of the airline’s CEO and CFO on the dais, Air Deccan was hardly in evidence.