Pantaloons the sentimental parting
A retail success story which started in 1997 and created waves among consumers and the industry has now transformed into a debt incurring entity. In a recent development Pantaloons, the lifestyle retail arm of Pantaloon Retail India Limited (PRIL) was bought by Aditya Birla Nuvo Limited (ABNL). The buyout took place to infuse `800 crore into PRIL, which is already saddled by a consolidated debt of `7,800 crore. ABNL will acquire a majority stake in the store chain, which will later be demerged to be listed as a separate entity - Pantaloons Format. Another `800 crore debt of PRIL will be transferred to this new entity whose majority stake will be held by ABNL.
This will then be converted into equity shares of the demerged entity – Pantaloons Format. In addition to this, PRIL will also transfer its debt of `800 crore to the new entity, where ABNL will hold the controlling stake.
Kishore Biyani has also sold stake in Future Capital to Warburg Pincus for `420 crore. As part of the transaction, Pantaloon Retail India Ltd and its wholly-owned subsidiary Future Value Retail Ltd will sell their stakes, which totals to 40 per cent, in Future Capital to Cloverdell Investment Limited, an affiliate entity of Warburg Pincus. Warburg will buy a 40 per cent stake in Future Capital directly from Pantaloon Retail and Future Value Retail at `162 per share. Further it will pump in `100 crore in primary capital via compulsorily convertible preferential shares amounting to an 8.7% stake. This will then trigger a 26% open offer, which if successful, will take Warburg’s stake in Future Capital to 74 percent. Warburg Pincus will acquire up to 70% in Future Capital and will be shelling out `1050 crore all in all.
Biyani has always insisted on the fact, that to get over with debts, Future Group will be exiting its non-core businesses, but Pantaloons sale came as a shocker. It has left the retail fraternity in a confused state of mind as to what is Future Group’s core and non-core business.
WHAT WENT WRONG?
The market capitalisation of PRIL, which stands at `3,600 crore and equity base at `3,141 crore, is far lesser than the consolidated debt. The debts came in with aggressive expansion plans and high capital cost. What also failed at their end was multi-brand FDI in retail which which PRIL was cashing in on, and that never took a flight.
“The company has been incurring losses for past two years now with monthly/quarterly interest outlook of `150-200 crore. In fact the Future Group has been looking forward to selling off its non-core businesses as well, including Future Capital, Future General Life Insurance and Future General Insurance and Future Equities. They are looking at multiple options to clear off debt from their books," comments Rikesh Parikh, Vice-President, Motilal Oswal Securities.
“Pantaloons became the chosen one, unlike HomeTown, Central or Big Bazaar, the multi brand retailing outlets, is because this was a standalone lifestyle arm of the company and segregation was easier," he clarifies.
“PRIL, now for long time has been reeling under the debt pressure, the interest coverage has been very low, on top of that the demand scenario went grim – all these escalated the problem, and hence there was an urgent need to scale down the debt. The company initially scouted to sell its non core retail business to bring down debt. News were doing the rounds regarding stake sale in Future Capital Holding (FCH) and the other businesses, but nothing materialised, so probably at the end it became a kind of compulsory for PRIL to take a call to sell off its Pantaloons format,” says Sangeeta Tripathi, a retail analyst with Sharekhan.
Retail has been the core business for Future Group which has also ended up being the most jinxed business for them. From losses to joint ventures going haywire, it all has happened in Biyani’s kingdom.
THE DEAL & THE STORY BEHIND
On 30th April 2012, Kishore Biyani flew to Kolkata to meet Kumar Mangalam Birla, Chairman, ABNL. The deal was struck on the 70th wedding anniversary of his grandparents, BK Birla and Sarala Birla. How significant was the day! Once young Sarla was handed over to BK Birla by her father, and the years after, on the same date, KB finalised to hand over his oldest retail venture to Kumar Mangalam Birla, Chairman of ABNL.
The press release on Aditya Birla Nuvo’s website carries the statement by Kumar Mangalam Birla: “The proposed acquisition is in line with our strategic intent to be on the top of the league and to create the largest integrated branded fashion player in the country through an extension into the value segment. This acquisition will catapult ABNL to the pole position in the branded fashion space in all the segments with a pan-India presence."
“On completion of the acquisition, the two entities, ABNL’s ‘Madura Fashion & Lifestyle’ and ‘PRIL', will work closely as partners to derive operational synergies, in terms of back-end, supply chain and many other important value drivers of the business. Furthermore, to ensure continuity, the current management team will continue to run the business," he added. Aditya Birla Nuvo when contacted was experiencing a silent period in terms of media interactions.
After the demerger and listing, the Birlas will make an open offer to public shareholders and take their own holding up to at least 50.01 per cent. The Biyanis will continue to hold around 25 per cent.
Moreover, with the departure of Pantaloons, Pantaloon Retail India Limited will now be known as Future Retail India Limited which will be operating the brands Central, Brand Factory, HomeTown and eZone.
STOCK PERFORMANCE
PRIL stock which was trading at `502.95 has only seen a downfall since then and today (as of 7th May 2012) the stock is trading at 165.60.
“PRIL stock has been performing badly on the indices over the last few months; the stock is down 37% over last 12 months," says Tripathi. “PRIL has been underperforming from past two years. Though there was a slight drift during December when there was talk of FDI in the market. Mid-year it went up to 347 or so, and since then it’s only been coming down," adds Parikh.
Moreover, there is also a possibility of the stock gaining momentum and bringing long term benefits for shareholders, because as the debt would come down, people will be able to give a better valuation to the stock price.
ABNL is infusing `1600 through debentures, and once the approvals come, PRIL will convert the debentures in share and will float open offer for the shareholders.
PRIL’S LOSS, ABNL’S GAIN
ABNL has been the gainer in this deal as it already has a number of renowned men’s lifestyle and formal wear brands, and gaining Pantaloons will kick starts their journey towards casual apparel for men. Moreover, it will also bring women’s ethnic wear category to its stable.
“For Aditya Birla Nuvo, buying stake into Pantaloon’s format is a good strategic fit and it completes and compliments Aditya Birla Nuvo’s subsidiary – Madura Garments portfolio, which has premium and lifestyle brands in men’s segment (like Louis Phillipe, Allen Solly, Van Heusen, The Collective) and in the value segment (Peter England People). This deal provides its entry into value oriented casuals business in the men’s segment while opens a new altogether women’s segment where Pantaloon is quite strong (one of the famous and high running brand is Annabelle)," says Tripathi.
Moreover, the buyout has immediately doubled the retail space of Aditya Birla Nuvo, which out and out is a gain.
WHAT NEXT FOR BIYANI?
Biyani who started off as an “eternal optimist” and moved on to becoming a “realist” is into a new phase of transformation, a title for which is yet to decide.
He entered into too many ventures in one go that it just exhausted his resources, in turn calling for distributed focus and capital. All this through he had his shares of appreciation and criticism but he continued to write the story in his own way.
With selling of Pantaloons, no saying, but Biyani seems to have become non-sentimental about his businesses, be it core or non-core. Now moving away from its fashion retail business, what’s on Biyani’s mind is hard to anticipate.
It is said, what goes around comes around; for Biyani, he might go back to his roots of being a manufacturer and probably transform himself into an FMCG player, of whom HUL should be watching out for. Or he might just turn himself into an exporter, of whom Orient Craft should watch out for.
GRAPEVINE
PRIL strictly needs to cut down on its debts and looking further grapevine suggests we might soon see an exit of Big Bazaar, Food Bazaar and KB’s Fair Price from Future Value Retail’s portfolio.
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