India's Aditya Birla to move branded apparel businesses into single unit

Mergers & Acquisition

India's Aditya Birla to move branded apparel businesses into single unit

India's Aditya Birla Nuvo Ltd. said it planned to consolidate all of the Aditya Birla Group's branded apparel businesses into Pantaloons Fashion & Retail Ltd, another listed firm in the US$ 40 billion conglomerate.

The group's various branded-apparel businesses will be split off from Aditya Birla Nuvo and other units and then consolidated into Pantaloons Fashion, which will then be renamed Aditya Birla Fashion & Retail Ltd (ABFRL), according to a company statement.

"The consolidation will unlock value for the shareholders by giving them an opportunity to participate in the promising fashion space directly through ABFRL," Kumar Mangalam Birla, chairman of the Aditya Birla Group, said in the statement.

Under the restructuring process, shareholders in Aditya Birla Nuvo will get 26 new shares of Pantaloons Fashion for every five of their shares in recompense for branded apparel unit Madura Fashion. Holders of unlisted shares in Madura Garments Lifestyle Retail Co Ltd will get seven new equity shares of Pantaloons Fashion for every 500 shares they hold after the Madura Lifestyle brand splits off from Madura Garments. Preference shareholders in Madura Garments will get one new common share in Pantaloons Fashion for each preference share held.

The transaction, which is subject to regulatory approval, is expected to be completed in the next six to nine months, the company statement said.

Why the Madura-Pantaloons merger makes sense

It’s a question that has crossed the minds of many analysts and investors who track the $40 billion-Aditya Birla Group. Why doesn’t the conglomerate combine its two branded apparel retailing arms, the second of which got created when the business house acquired Pantaloons Fashion and Retail Ltd from the Kishore Biyani-led Future Group in 2012?

The benefits of the merger for the Kumar Mangalam Birla-led group are manifold. It leads to the creation of what the group calls “India’s largest pure-play branded apparel company” with a much healthier balance sheet, a diverse product portfolio, and operational synergies.

On a pro-forma basis, Aditya Birla Fashion and Retail (as Pantaloons is proposed to be renamed) had a consolidated turnover (that is, Pantaloons’s turnover plus Madura’s turnover) of Rs 4,759 crore in fiscal 2014, 25% higher than the year earlier. Its earnings before interest, tax, depreciation and amortisation, or Ebitda, stood at Rs 401 crore in the same period, up 28.5% over fiscal 2013.

Compare this with what Pantaloons’s standalone financials look like at present: Its turnover stood at Rs 1,661 crore in FY14, Ebitda at Rs 39 crore and the company incurred a net loss of Rs 18.7 crore.

One of the biggest challenges Pantaloons faces, which was also a major factor in Biyani deciding to sell the company, is the high level of debt. Strengthened with the financial muscle (especially higher profitability) that Madura brings to the table, Pantaloons will have a much better debt profile.

As on September 30, Pantaloons had an outstanding debt of Rs 1,085 crore. This meant that the company’s debt to Ebitda ratio stood at an alarming 27.8: 1. But when Madura’s earnings are taken into account, Pantaloons’s debt to equity ratio dramatically improves to around 3.88:1. This is after taking into account a net debt of Rs 473 crore that is proposed to be transferred to Pantaloons along with Madura’s businesses.

A substantially healthier balance sheet will also help Pantaloons raise external equity, if it so chooses, to fund further growth. Combining forces will also help Pantaloons explore synergies through economy of scale. The two retail arms, combined, have a retail footprint of 4.8 million sq ft, spread across 1,869 stores and around 6,000 additional points of sale.

“The consolidation will enable tapping of operational synergies on various fronts such as sourcing, real estate, and technology platforms,” Aditya Birla Group said in its statement issued on May 3.