BackProxy advisory firm opposes Pantaloon Retail restructuring
InGovern alleges the retailer’s resolution will dilute the voting rights of equity shareholders in Future Lifestyle
Premium(Hindustan Times)
Mumbai: Independent proxy advisory firm, InGovern Research Services Pvt. Ltd, advised shareholders to vote against debt-ridden Pantaloon Retail India Ltd’s resolution to demerge its fashion business into wholly-owned subsidiary Future Lifestyle Fashions Ltd (FLFL).
In a media note on Tuesday, InGovern alleged, among other things, that the retailer’s resolution not only lacked transparency but will also dilute the voting rights of equity shareholders in the to-be-listed company, FLFL. Pantaloon Retail provided a detailed rebuttal.
In November, Future Group—the parent company of Pantaloon Retail and Future Ventures India Ltd—announced a restructuring exercise to consolidate the fashion business into FLFL. The scheme is subject to regulatory approvals.
InGovern, in its note, said the scheme of arrangement and amalgamation treats Differential Voting Right (DVR) shares and equity shares at par, giving one equity share of FLFL (the new entity) for every three shares—equity or DVR—of Pantaloon Retail.
A DVR share is like an ordinary equity share, but provides fewer voting rights to the shareholder. DVRs trade at over a 30% discount to Pantaloon Retail’s equity price, the report said. In the quarter ended 31 December, Pantaloon Retail’s promoters increased their DVR holding to 51.45% from 47.01% on 30 September.
On 5 March, the management tabled a resolution for shareholder approval to increase the voting rights of DVRs from one-tenth of Pantaloon Retail equity shares to three-fourths.
“Since shares are being allotted to shareholders of both Pantaloon Retail and Future Ventures, the same could not be in the same proportionate holding as in the respective demerging companies. Further, in addition to other shareholders, even promoters are receiving diluted interest in the resultant entity. In fact, the promoters’ shareholding in FLFL will be at 31.64%, which is lower than that in Pantaloon Retail (44.19%) and Future Ventures (38.25%)," said a Pantaloon Retail spokesperson in an email response on Tuesday.
The retailer also defended its move to give same share exchange consideration for both equity and DVR shareholders as “there is no difference in rights of PRIL normal shareholders and DVR shareholders, as both of them are equity shareholders holding similar economic interest in the assets of the company. Both normal equity shares and DVR shares have the same face value of ₹ 2."
The InGovern report, meanwhile, pointed out that the company has not disclosed publicly any of the scheme-related documents, namely the composite scheme of agreement, valuation report, audit committee report, fairness opinion by the merchant banker or the latest audited financials of group companies.
Listed firms seeking listing after a scheme of arrangement are required to publicly disclose all scheme-related documents on their website, according to a Securities Exchange Board of India (Sebi) circular dated 4 February.
“The company has complied with applicable regulations and the documents mentioned above are available in the public domain for shareholders," the company countered in its email response.
Five of the six retail analysts and consultants contacted by Mint on Tuesday agreed that India’s largest listed retail company—which runs the Big Bazaar, Food Bazaar, Central and Brand Factory retail chains—needs to be more transparent.
“The current structure is quite complicated with group companies supplying to each other and ownership of brands lying in different entities. We need to understand how the debt and inventory flow will get apportioned between the three entities once it’s restructured," said Abneesh Roy, analyst with Mumbai-based brokerage house Edelweiss Securities Ltd.
To be sure, the realignment will help simplify the company structure, making it more compliant for future deals with foreign partners.
“We believe the new structure will not only help reduce debt in the core retail business, but also sharpen focus on the business. However, concerns on slow same store sales (SSS) and higher inventory levels remain," said a December report by Edelweiss. SSS is a measure of growth based on sales in stores that have been open for at least a year.
Pantaloon Retail’s stand-alone debt for the full year ended June 2012 was ₹ 3,636.07 crore, according to data compiled by Capital Market Publishers India Pvt. Ltd. The company has not reported earnings for the year ended 30 June. The company is yet to announce results for the 18 months ended 31 December.
“We expect it (the debt) to come down to approximately ₹ 3,500 crore, leading to significant interest cost savings which will flow straight to the bottomline," said ICICI Securities Ltd analysts in a November report.
The company is expected to reduce its debt with the sale of a majority stake in the Pantaloon department store chain to Aditya Birla Nuvo Ltd and the sale of a 40% stake in Future Capital Holdings Ltd to Cloverdell Investment (a Warburg Pincus affiliate) besides the restructuring exercise.
Shares of Pantaloon Retail ended at ₹ 220.30 on BSE on Tuesday, down 0.34%. The benchmark Sensex rose 0.69% to close at 19,635.72 points. Since 5 March, when the company enhanced the DVR rights, prices of the instrument have risen 40.48% and the shares by 27.48%, while the Sensex has gone up by 13.09% in the same period.
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