Mumbai: American private equity (PE) group TPG has nudged ahead of two other funds in the race to own less than 15% of Pantaloon Retail (India) Ltd, two people familiar with the development said. The retail chain, India’s biggest by revenue, has been in talks with at least three PE investors to raise money and expand its network of stores.
TPG manages nearly $45 billion (Rs2.13 trillion) across several funds. TPG apart, two other PE players that have been in talks with Pantaloon Retail are Bain Capital Llc. and Apax Partners Inc.
According to one of the people familiar with the development, Pantaloon Retail wants nearly Rs400 a share and talks with TPG are at an advanced stage. At Rs400 a share, a 33% premium on Monday’s closing price of Pantaloon Retail stock, the PE fund will need to bring in about Rs950 crore to buy a 14.9% stake. The Pantaloon Retail stock on Monday dropped 4.27% on the Bombay Stock Exchange to close at Rs299.55 even as the Sensex lost 2.9% to close at 14,665.92. At this price, Pantaloon Retail’s market capitalization is Rs4,771.58 crore.
Reaching out: Pantaloon Retail’s Kishore Biyani. Hemant Mishra / Mint
The deal will be the largest foreign investment in any Indian retail chain, said one of the people familiar with the development, but he declined to say at what price it is being struck.
“TPG leads the race to invest in the group and the exact structure of the deal will be clear in few weeks,” he added.
Under the acquisition guidelines of India’s capital markets regulator, any entity that purchases 15% or more in a firm is required to make an open offer for at least an additional 20% stake. This is why acquirers normally restrict their stake purchase below 15%.
Kishore Biyani, Pantaloon Retail managing director, said the information is speculative. But the Pantaloon Retail board on Monday approved the company’s plan to raise up to Rs1,000 crore through issuance of instruments including preferential shares.
In an email reply to Mint’s query, Puneet Bhatia, TPG India’s managing director, said: “We will not be able to provide any comments.”
“Biyani is now finalizing the structure. He may issue preferential shares to the US investor,” said one of the people familiar with the development.
Pantaloon Retail owns Big Bazaar, Pantaloon, Home Solutions, Food Bazaar, Central and other retail formats.
Under existing norms, foreign portfolio investors can own up to 26% stake in Indian retail chains. Investment by PE investors is considered to be portfolio investment.
Hit by slower sales in items of daily consumption known as value retail and high-end products termed as lifestyle retail, Pantaloon Retail has been finding it difficult to raise money.
The company recently raised Rs275 crore issuing 11 million preferential shares to Biyani at Rs183 a share and four million shares to Bennett, Coleman and Co. Ltd, which publishes The Times of India and The Economic Times.
The Pantaloon Retail board recently proposed to rechristen the company Future Market and Consumer Goods Ltd, a holding company for its multiple subsidiaries.
After Pantaloon Retail’s third quarter earnings, Bhushan Gajaria and Nikhil Vora of Mumbai brokerage IDFC-SSKI said in an April report, the proposed restructuring and fund raise would be “critical monitorable” for Pantaloon Retail.
They said “our near-term concerns pertain to slower business growth, highly leveraged books with gearing ratio of 1:1.6, inadequate growth funding and limited scope for value unlocking in the subsidiaries. PRIL (Pantaloon Retail), that had debt of Rs3,000 crore, required Rs750 crore till October 2010 from April 2009”.
Both analysts believed that removal of excesses would help Pantaloon Retail improve the economics of the business.
The firm reported a marginal rise in net profit to Rs34.37 crore for the quarter ended March from Rs32.1 crore in the corresponding period in the previous year. It follows a July-June fiscal year. The sales during the period increased to Rs1,642.09 crore from Rs1,354.34 crore.
During the nine months to March, there was a marginal rise in net profit to Rs104.09 crore from Rs93.4 crore. It would have been higher but for the high interest payments of Rs227.27 crore against Rs119.81 crore in the year-ago period.
On 19 March, rating agency Fitch Ratings Ltd said Pantaloon Retail was witnessing pressures in its operating cash flow and losses were continuing at some of its key subsidiaries. The agency has downgraded Pantaloon Retail’s short-term debt instruments from F1 to F2+. The revised rating denotes a good capacity for timely payment of financial commitments, whereas an F1 rating indicates strongest capacity for on-time payment.
“The rating action reflects the ongoing pressure on PRIL’s operating cash flows during H1 FY09 due to slowing same store sales growth, primarily in lifestyle retailing and to some extent in value retailing,” Sundeep Mullick of Fitch said.
According to the agency, a substantial equity infusion supporting Pantaloon Retail’s capital structure and debt metrics could lead to a upward revision in the rating outlook.
The deal with TPG will be insulated from the joint venture Pantaloon is currently negotiating with European retailer Carrefour SA. “At some stage, the joint venture with will be in a new company similar to the Carrefour Wal-Mart venture with Sunil Mittal’s Bharti group,” a company executive told Mint. He did not want to be identified as he is not authorized to speak to media. “We will source goods together. We will purchase the franchise rights of Carrefour in India like Easy Day brand of Wal-Mart used by Bharti,” he added.