Investment Shastra

The Pantaloons stake sale – What does it mean for you?

The recent announcement of Aditya Birla Nuvo buying into Pantaloons apparel format has set the stage for consolidation in the Indian apparel retail business. On 30th April 2012 Pantaloon Retail announced a stake sale in its Pantaloons apparel format to Aditya Birla Nuvo Ltd (ABNL) to reduce its debt burden and improve profitability. In fact this news had a positive impact on the share price of Pantaloon Retail which shot up by ~9% on the announcement day. But, before analysing what it means for you as investors let’s see what the deal entails:

So, what is the deal?

Under the deal, Pantaloons – the apparel retail chain, will be demerged from Pantaloon Retail India Ltd (PRIL), into a separate entity. The Pantaloons format is present in 35 cities with 65 stores and 21 factory outlets covering a total retail space of more than 2 million sq. ft. It is expected to post sales of around Rs. 1,700 Cr. for the year ending June 2012.

Further, Aditya Birla Nuvo Ltd (ABNL), that owns Madura Fashion & Lifestyle, will subscribe to debentures amounting to Rs.800 Cr. issued by PRIL. On completion of the demerger process, the debentures will convert into equity in the demerged entity. Apart from this, the demerged entity will carry a debt of Rs.800 Cr.  on its balance sheet transferred from PRIL. In-effect this will reduce PRIL’s debt  by Rs.1,600 Cr. (800 Cr. of debentures+ 800 Cr. taken over by the demerged entity).

This will be followed up by an open offer to acquire 26% stake in the demerged entity by ABNL After the listing of the resulting entity and on conversion of debentures into equity, ABNL’s holding in the company post open offer shall be a minimum of 50.01%. The entity will then become a subsidiary of ABNL. The existing shareholders of PRIL, including its promoters will continue to own shares in the demerged entity.

The proposed transaction is likely to be completed within 8 to 10 months, subject to the finalisation of the Scheme of Arrangement, due diligence and statutory and other requisite approvals.

How will PRIL and ABNL benefit from this deal?

PRIL – PRIL operates a number of retail chains including Pantaloons Format, Central, Big Bazaar, Food Bazaar, Home Town and eZone and also has allied businesses in consumer finance, life and non-life insurance, logistics infrastructure, supply chain and brand development.

To expand these retail chains, PRIL had more than doubled its debt in the last couple of years to Rs.7,846 Cr. at the end of June 30, 2011. This has led to higher interest outgo, affecting the profitability of the company. In the current high interest rate environment and weak economic conditions, the company has seen a significant decline in its margins. Thus the company would have faced difficulties in servicing its debt obligation in future.

Through this deal, the management is looking to lower the debt burden and improve its profitability. With this deal, the company will reduce its ballooning debt by around 20% to around Rs.6000 Cr. The reduction in debt will help PRIL  improve its liquidity situation and profitability in future.

ABNL – Madura Fashion & Lifestyle, the branded apparel retailing business of Aditya Birla Nuvo, is one of the largest premium-branded apparel players in India with a turnover of more than Rs.1800 Cr. Its popular brands are Louis Philippe, Van Heusen, Allen Solly, and Peter England. It has around 1000 exclusive brand outlets (EBO) and around 1250 departmental stores and multi-brand outlets.

The deal is in line with ABNL’s strategy to become one of the top apparel players in India. After acquisition of Pantaloon apparel format, Madura Fashion will become the largest integrated branded fashion player in the country with a total turnover of around Rs. 4000 Cr. and a vast retail distribution network.

What is in it for investors?/What does this mean for investors?

Even after the deal, Pantaloon Retail’s total debt will continue to remain high (~Rs. 6000 Cr.). The company is also working on various other restructuring options such as a stake sale in its other subsidiaries to reduce debt. Having said this, the deal will ease the liquidity problem in the short-term by improving the profitability to a certain extent.

On the other hand, ABNL is already sitting on huge debt of more than Rs.9000 Cr with a Debt to Net Profit ratio of close to 10 as of FY-11. With this deal, ABNL’s debt will further increase and might affect its profitability going ahead.  On the positive side, the demerged entity will have will have only Rs. 800 Cr. of debt and a debt to equity ratio of less than 1. It is expected that Madura Fashion & Lifestyle will merge with this demerged entity. If this happens, it would be the largest apparel retail company with relatively less debt and large distribution network. Going forward, this merged entity could be a good bet for the investors in the apparel space. But, it remains to be seen how Pantaloons performs under the management of ABNL and whether the merger with Madura Fashion happens.  Hence, investors would be advised to wait till the demerged entity gets listed on the stock exchange.

The Pantaloons stake sale is a clear indication that the retail apparel industry is witnessing tough times. And when a big brand like Pantaloons had to opt for a stake sale to reduce its debt, the mid-sized apparel companies are even more hard-pressed. Our next article on Tuesday will talk about the pain mid-sized retailers are going through and how their stocks have performed in the past. Watch this space for the same…

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