Future Perfect


May 5, 2012

Vishal Krishna, Businessworld

Bangalore, 5 May, 2012

It is not just a marriage of convenience; there could be love involved, too. Aditya Birla Nuvo (ABN), with annual revenues of $4 billion, a mini-conglomerate within the $35-billion Aditya Birla Group, has acquired a portion of Pantaloon Retail India’s (PRIL) lifestyle business.

Eighty-six Pantaloon fashion retail stores will form part of a new entity, controlled by ABN, which will be automatically listed on the BSE and the NSE. A Future Group official says that ABN has acquired a minority stake by subscribing to Rs 800 crore worth of convertible debentures, which will be converted into equity when the new entity is formed. ABN will make an open offer to PRIL’s shareholders; ABN will eventually have 50.1 per cent stake in the new firm.

ABN has also paid another Rs 800 crore to service the debt of PRIL. Both groups have yet to decide the swap ratio (JM Financial acted as advisors to the deal) that will determine the shareholding pattern in the new entity. The word on the street is that PRIL will own 25 per cent in the new entity and will manage the operations of the 86 stores whose revenue is expected to reach Rs 1,700 crore for the financial year ending 30 June 2012.

For the Future Group, the happy marriage means that Rs 1,600 crore out of the Rs 5,256-crore debt will be wiped off PRIL’s balance sheet, giving Future Group chairman Kishore Biyani a breather. “This is the first of the many steps to reduce the debt of the Future Group,” says Devangshu Dutta, CEO of Third Eyesight, a retail consultancy.

But is the union good for ABN, too? ABN’s business generates $4 billion in revenue, but its lifestyle business makes only $400 million. The new entity should change that for the better. ABN’s Madura Fashion is the largest premium-branded apparel player in India, with brands such as Louis Philippe, Van Heusen, Allen Solly and Peter England as part of its stable, and retails through 1,082 exclusive brand outlets, apart from being sold in more than 1,250 departmental stores and multi-brand outlets.

ABN has a distributorship tie-up with leading brand Esprit and it retails international brands under ‘The Collective’, a luxury store. Access to PRIL’s network will double ABN’s revenues and make it the single largest chain in India. The combined revenue of rivals Shoppers Stop (50 stores) and Lifestyle (40 stores) will be about that of the new ABN/Pantaloon entity.

The buyout will give ABN access to markets where it has no presence: tier-II and tier-III towns, where the future exponential growth of the retail sector is expected to come from. So why did PRIL sell a stake in a venture that was highly profitable for the Future Group? “The rising debt levels of Pantaloon have been affecting the growth of the group,” says D.K. Aggarwal, CMD of SMC Investments and Advisors. “They have been paying about 60 per cent of their revenues as interest costs.”

Other analysts call this a clever move by ‘Mr Retail’. PRIL’s Rakesh Biyani and Kailash Bhatia will continue to run operations; a “Fashion Council” with the best talent from Madura Fashion and Future Group will advise the new firm on leveraging its strengths. And with the financial muscle of Aditya Birla Group behind him, Kishore Biyani’s legacy remains intact.

(This story was published in Businessworld Issue Dated 14-05-2012)