Pantaloon Retail (India) Ltd restructuring programme is moving into its next leg. Earlier, it had demerged its value retail businesses (Big Bazaar and Food Bazaar) into a wholly owned subsidiary and hived off non-core businesses such as support services and financial services. These businesses could grow independently of Pantaloon. It could even raise money through stake sales. Its current move consolidates its retail businesses into one entity.
Home Solutions operates formats like Home Town, e-zone, Furniture Bazaar and Electronics Bazaar. Its key businesses—consumer durables, home furnishing, home improvement and furniture—are being merged with Pantaloon. Electronics is missing from the list.
Home Solutions had sales of Rs594 crore and earnings before interest, taxes, depreciation and amortization (Ebitda) of Rs2.5 crore in the six months ended September 2009. In comparison, Pantaloon had stand-alone sales of Rs3,700 crore and an Ebitda of Rs400 crore.
Now, Pantaloon will issue 5.9 million equity shares and issue 6.4 million preference shares to Home Solutions’ minority shareholders. The preference shares will be converted into an equal number of equity shares after one year. The resulting equity dilution would be around 6%. The notional value of the 12.3 million shares so issued is Rs471 crore, based on Pantaloon’s share price of Rs383; valuing Home Solutions at around Rs1,427 crore or 1.2 times annualized revenue.
Graphic: Yogesh Kumar / Mint
In comparison, Pantaloon has a market capitalization of Rs7,300 crore, around 1 times of its?stand-alone sales. What’s more, the Home Solutions business has far lower profit margins. The valuation differential may be explained by higher growth expectations and the possibility of a higher degree of improvement in profit margins.
The Home Solutions business will add to stand-alone sales but will lower overall margins. Competition in the business is fierce and investments in inventory are higher, since these are big-ticket items, especially in electronics. The company had said in an analyst call that even when business was low, they had to maintain a certain level of inventory in the electronics business.
That, perhaps, explains why it has been left out of the merger.