Mumbai: Kishore Biyani-promoted Future Group announced on Monday that it will sell its 53.67% stake in consumer finance company Future Capital Holdings Ltd (FCH) to private equity firm Warburg Pincus India Pvt. Ltd in an all-cash deal worth Rs692 crore.
The deal will give the Future Group’s retail arm Pantaloon Retail (India) Ltd much-needed cash to help reduce its debt and is a part of the group’s intention to “exit from non-core businesses of Pantaloon Retail”, the company said in an emailed statement.
Pantaloon, India’s largest listed retailer, had debt of around Rs5,500 crore as of March, according to a 16 May ICICI Securities Ltd report.
Warburg Pincus will initially buy 40% of shares from Pantaloon, which will be followed by an open offer to buy another 26% in the company, FCH vice-chairman and managing director V. Vaidyanathan said.
“If the open offer is not fully subscribed, then Pantaloon will sell up to 13.67% of the total shares to ensure Warburg gets 66% of the company,” said Vaidyanathan, who will be nominated as chairman and managing director after the deal gets shareholder approval.
The deal at Rs162 per share was at a premium to FCH’s stock price, which ended at Rs143.55 on BSE, up 4.78% from the previous close and outstripping the 0.15% rise in the 30-share Sensex.
US-based investment bank Morgan Stanley advised Pantaloon, while Enam Securities Pvt. Ltd was co-adviser to the Future Group.
Warburg Pincus will also infuse Rs100 crore in FCH through a preferential allotment, which has been cleared by the board of directors, but has yet to be approved by the shareholders. The preferential allotment, through so-called compulsorily convertible preference shares, will take Warburg’s stake beyond 70%, Vaidyanathan said.
This is the second such deal involving the Future Group in just over a month. On 30 April, Aditya Birla Nuvo Ltd, a part of the $28 billion (Rs1.6 trillion) telecom-to-retail Aditya Birla Group, said it was acquiring at least 50.01% in the Pantaloons retail chain by issuing debentures worth Rs800 crore at mutually agreed terms and taking on debt of Rs800 crore.
FCH is a non-banking financial company (NBFC) that gives loans to medium and small enterprises, gold loans, two-wheeler loans and offers broking services. It is a wholly owned arm of Pantaloon Retail formed in 2007, and had a loan book of Rs4,670 crore at the end of March, with 197 branches in 41 cities.
“This deal is more about Pantaloon cutting its debt than equity infusion for FCH. Their leverage will come down to about five times of its earnings before interest, tax, depreciation and amortization from about eight times now, which is still stressful, but more manageable,” said an analyst at a brokerage firm tracking the deal. He did not want to be named because his report is still not public.
Other analysts also said the deal was positive for FCH because it infuses capital into the NBFC and brings in a strong promoter who could take the business forward.
Vaidyanathan said he expects FCH to target a loan growth of 30-40% in fiscal 2012-13.
“Warburg is a good company with a management team of great reputation. Their previous investments in India in Bharti Airtel, HDFC and Kotak Mahindra Bank have all helped those companies to grow, and I expect the same from this deal,” he said.
Vaidyanathan, who owns a 7.6% stake in FCH, said he has no plans to sell. “Typically, Warburg has a 5- to 10-year horizon for their investment and I expect to outlive that period in the company,” he said.
Over the past decade, affiliates of Warburg have invested about $3 billion in Indian firms, including cement maker Ambuja Cements Ltd, media group DB Corp. Ltd and pharmaceutical firm Piramal Healthcare Ltd. Warburg Pincus refused to add anything to the press statement.
“Future Capital is led by a highly experienced and dedicated management team, and has developed a unique and differentiated financial services business. The company is well-placed to address the needs of the large, underserved base of medium and small enterprises and retail customers across India, and we are excited to be part of this opportunity going forward,” Vishal Mahadevia, managing director at Warburg Pincus India, said in the release.
Biyani, founder and group chief executive of the Future Group, said the transaction is in line with the group’s intention to exit from non-core businesses of Pantaloon Retail, and is aimed at reducing debt and further strengthening the balance sheet of the company.
“We are pleased to have Warburg Pincus as partners in Future Capital Holdings, and are sure that they will have the support of all the existing shareholders and the management team in helping the company build and grow its financial services platform,” Biyani said.
A brokerage firm analyst who tracks the group said the deal’s valuations are positive for Pantaloon and FCH. Added another analyst: “It was done at a high book value, which is very good. We are expecting more transparency in the company after Warburg takes over.” He declined to be named because he’s not allowed to speak to the media.