Mumbai: Operational synergies at the back end and plugging gaps such as womenswear and kidswear in its apparel portfolio were the key triggers for Aditya Birla Nuvo Ltd to consider acquiring a controlling stake in the Pantaloon retail chain, the company’s management said.
This is the first time the Aditya Birla Nuvo management has officially spoken about its proposed acquisition of the value apparel format from debt-laden Pantaloon Retail (India) Ltd (PRIL), a part of the Kishore Biyani-led Future Group.
Since the company was in the so-called silent period leading up to the announcement of its results on Tuesday when the deal was announced, Aditya Birla Nuvo executives did not speak about it at that time. Only a statement was issued on 30 April.
“There can be a lot of operational synergies between the two retail chains, including logistics management, sourcing, and designing,” said Sushil Agarwal, whole-time director and chief financial officer at Aditya Birla Nuvo. “The fashion council that will be set up will look into these things.”
The company will acquire at least 50.01% in Pantaloon to give itself majority control by infusing Rs 800 crore through debentures that will be converted into equity shares at the time of the retail chain’s separation from PRIL. It will also acquire Rs 800 crore of debt associated with the demerged entity.
A fashion council is being set up with top executives of both sides, including Aditya Birla group chairman Kumar Mangalam Birla and Biyani to aid and advise the management of the newly created company on ways to leverage the partnership.
“The two companies coming together will lead to a wider platform and synergies in real estate, supply and sourcing,” said Pinaki Mishra, partner, retail and consumer products practice, at Ernst and Young. “There could be synergies from cross-selling to customers as well, but how that will be done has to be seen.”
Elaborating on the deal, Agarwal said that initially Aditya Birla Nuvo will acquire around 45% in the Pantaloon retail chain for Rs 800 crore. The second stage of the deal will entail a mandatory open offer for an additional 26% equity in the demerged entity that will be listed. Agarwal said that in case the open offer isn’t subscribed to the extent of providing Aditya Birla Nuvo majority control, the existing promoters of Pantaloon will offload additional shares to make good the shortfall, under an agreement.
The company has already begun due diligence into Pantaloon’s assets, managing director Rakesh Jain said, and added that the process should be completed in the next six to eight weeks. The deal itself could take 8-10 months to close after securing necessary approvals.
Aditya Birla Nuvo’s unit, Madura Fashion and Lifestyle, has thus far focused on retailing premium apparels, mostly for men, under brands such as Louis Philippe and Allen Solly, while Pantaloon has catered to the value format with brands such as Bare, Ajile and John Miller.
“Around 40% of the business in apparel retailing is in the value segment, while Madura is more focused on premium brands,” Agarwal said. “This gap is now being plugged.”
The combined entity could have a turnover of around Rs 5,000 crore once the deal is completed, Agarwal said.
Aditya Birla Nuvo will utilize internal accruals and Rs 1,500 crore funds infused by promoters through warrants to finance the deal. The company also has a capital expenditure plan of Rs 650 crore in fiscal 2013, up from Rs 350 crore in fiscal 2012.
The holding company for the Aditya Birla Group’s interests ranging from financial services and telecom to apparel retail reported a 42.17% year-on-year (y-o-y) decline in net profit to Rs 170 crore for the March quarter. Net sales rose 15% y-o-y to Rs 5,994 crore.
Profitability was hit due to an exceptional one-time provisioning of Rs 104 crore on account of a disputed tax liability, which is being contested in the Supreme Court.
Segments such as financial services, excluding life insurance, and fashion and lifestyle reported strong operating profits. The fashion and lifestyle business, along with agri-business, telecom and information technology, also helped the firm register a higher turnover.
Carbon black and insulators are two segments within the company’s portfolio that took a severe hit in the March quarter, explained Jain, due to Chinese imports being dumped in India. This was “bleeding the whole industry”, Jain said and added that the telecom-to-textiles conglomerate is urging the government to levy anti-dumping duty on Chinese imports to safeguard domestic manufacturers.
The Aditya Birla Nuvo stock lost 2.6% on BSE on Tuesday to close at RSs807.30, while the benchmark Sensex rose 0.69%.
PRIL, which also announced its March quarter earnings on Tuesday, saw a steep y-o-y decline in net profit due to weak demand largely in the home and electronic retail categories and high interest rates. Consolidated net profit slumped to Rs 12.03 crore from Rs 50.54 crore a year earlier. Net sales in the same period rose 7.63% to Rs 3,206 crore.
Net profit for core retail operations, which include the retail businesses of Big Bazaar, Food Bazaar, and the soon-to-be-separated retail chain Pantaloon, declined 73% to Rs 5.43 crore. Turnover from these formats increased 10.6% to Rs 1,141.34 crore from Rs 1,032.01 crore in the same quarter a year ago.
The same store sales growth (SSG) for the quarter in lifestyle retail stood at 3.46%, for value retail at 2.66% and at a negative 7.33% in the home retail business. “The SSGs were impacted by weak demand largely in home and electronic categories,” the company said in an investor update. SSG is a measure of growth based on sales in stores that have been open for at least a year.
The retailer reiterated its commitment towards deleveraging its balance sheet and strengthening its core businesses in retail, in the investor update.
At the board meeting on Tuesday, the company agreed to a proposal to transfer its HomeTown division to one of its wholly owned subsidiary companies, subject to necessary approvals.
“The transfer into another subsidiary would not really impact their core retail numbers,” said Sameer Narang, an analyst at HDFC Securities Ltd.
In the quarter, PRIL added 0.51 million sq. ft of total retail space resulting in a total operational retail space of 16.33 million sq ft. The PRIL stock lost 2.45% to close at Rs 147.2.
Bhuma Shrivastava contributed to this story.