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Birla Group shops for Pantaloon: Why its a win-win for both

by FP Editors May 1, 2012 #Aditya Birla Group #CorporateStrategy #NUVO #Pantaloon Retail India EmailShare inShare22 Comments

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Aditya Birla Nuvo (ABN), part of the Aditya Birla group, is to pay an initial Rs 800 crore towards acquiring a controlling stake in the Pantaloons Format clothing brand and retail chain which is being demerged from the broader Pantaloon Retail business, it said on Monday. As part of the deal, the apparel and fashion retail stores under the Pantaloons format will be spun off from Pantaloon Retail, which is part of the Future group, into a separate entity. ABN will subscribe to debentures worth about Rs 800 crore to be issued by Pantaloon Retail, which will be later converted into equity in the new entity. Debt of Rs 800 crore under Pantaloon Retail will also be transferred to the new entity.

AFP

ABN will also make an open offer of a minimum 26 percent to the shareholders of the new company. After the open offer, ABN will have a minimum 50.01 per cent stake in the newly created entity post the open offer. However, Kishore Biyanis Future group will continue to have around 25 percent in the de-merged entity. Most experts believe the deal is a likely win-win for both companies. How the deal helps Aditya Birla Nuvo 1)Pantaloons, launched in 1997, is the largest fashion retailer in the country by market capitalisation. Gaining a controlling stake in the company will help Aditya Birla Nuvo expand in the branded apparel business. 2) ABNs chairman Kumar Mangalam Birla said the proposed acquisition is in line with its strategic intent to create the largest integrated branded fashion player in the country. ABN has its own presence in the apparel retail business through its Madura Fashion and Lifestyle division, which owns renowned brands like Allen Solly, Louis Philippe, Van Heusen and The Collective. 3) While ABN is strong in mens brands, acquiring a controlling stake in Pantaloon gives it several brands across categories for men, women and children. We will get a large section of the market that we were not present in, basically fast-fashion. It allows us lower price points and entry into ethnic and children wear, Pranab Barua, head of fashion & lifestyle (branded apparel business) at AB Nuvo said, according to The Economic Times. 4) The new entity is likely to become Indias largest fashion retailer, according to experts. The purchase will help Madura add more than two million square feet to its existing retail space of 1.6 million square feet. 5)Vishal Kampani, managing director of JM Financial, estimated the new company could beworth $1 billion after it is listed, according to The Economic Times. How the deal helps Future group 1) Pantaloon Retails debt will decline by Rs 1,600 crore. That will go some way in soothing investor concerns, since the Future group has a worrying debt level of about Rs 5,000 crore. The deal with ABN, which is likely to be carried out in phases over 8-10 months, is set to cut Futures debt by Rs 1,600 crore. 2) One analyst at a foreign brokerage said that selling off the fashion apparel business wouldlower Pantaloons inventory days, which is one of the highest in the industry, leading to more efficient working capital, according to The Economic Times. Inventory days is a ratio that measures the average number of days a company holds inventory before selling it. 3) The deal comes at a difficult time for retailers, many of who have been scrambling for funds after the government back-tracked on a proposal to allow foreign direct investment in the multi-brand retail sector last year. A number of retailers like Subhiksha and Vishal Retail have had to shut shop or sell out after defaulting on loans, and some like Koutons Retail are struggling for survival. Many have had to curtail

expansion plans because of the high cost of borrowings, as a report in Wall Street Journal points out.