Last week, Kishore Biyani, through a landmark deal sold controlling stake in Pantaloon Retail to Kumar Mangalam Birla. The move has showed an innovative path of consolidation as the way forward for India’s staggering organized retail sector. Instead of endlessly waiting for political parties to reach a consensus over FDI in multi-brand retail, Future Group and A V Birla went a step ahead by inking a fundamentally viable businesses strategy, focused on sales and profits.
Terming the partnership a win-win situation for both, Harminder Sahni, Director, Wazir Advisors says, “AV Birla is the right buyer. They got into fashion business with acquisition of Madura Garments and have grown that business almost 10 times since then. They have the management bandwidth, capital as well as vision and patience to create a multi-billion dollar fashion house like a GAP, ZARA or Liz Claiborne in the next 10 years. My guess is that they will be a Rs 20,000 crores fashion business by 2020-25. On the other hand, Biyani knows fashion business the best and he has created a good business in Pantaloon that now AV Birla can take to next orbit of growth. It will make Future Group financially stronger and also give Pantaloon a chance to challenge Shoppers Stop and Lifestyle.”
While the deal gives Birla access to the most profitable chunk of the fashion retail business, the debt ridden Future Group can now get rid its burden over an expectedly short period. For Biyani, weighed down by Rs 5,800 crores debt, and with limited avenues to raise fresh equity from foreign investors, the deal brings immediate cash of Rs 800 crores in the BSE-listed flagship Pantaloon Retail (PRIL). It will also be able to transfer an equivalent Rs 800 crores of debt to the demerged entity, helping PRIL to cut debt to Rs 4,200 crores.
Explaining that Pantaloons and Aditya Birla have different reasons to get into the deal, Ankur Bisen, Associate Director-Retail, Technopak Advisors says, “It is a great deleveraging opportunity for evolution of Future Group. Though it started with Pantaloons, over the last 15 to 20 years, it has actually evolved as a retailer operating in various retail formats. Even though Pantaloons was probably the jewel in the crown, but it is to some extent a non-core activity for the Future Group. Realizing that they would like to grow as a retailer and not as an apparel brand owner, the Group must have gone ahead with this deal.” And goes on to add “If you look at the kind of debt pressure the Future Group has, it stands to gain in the short term with this deal.”
But experts feel, the deal goes more in favor of the AV Birla Group, since Biyani loses a large chunk of the high-margin, fast- growing fashion retail business. Aditya Birla Nuvo, which through its subsidiary Madura Fashion & Lifestyle, controls apparel brands such as Allen Solly, Louis Philippe, Van Heusen and Peter England, and the acquisition of majority stake in Pantaloon, will enable it to cater to customers at the lower segment in the value chain. With its bouquet of brands, Madura can not only attract the young it also gets to more than double the Group’s retail space from 1.6 million sq. ft. to 3.65 million sq. ft. And the combined entity’s turnover will go up by almost 80 per cent. Pantaloons’ Rs 1,700 crores turnover will add to Madura’s Rs 2,145 crores top line. “The Aditya Birla group gains significant control over one of the largest modern large-format chains in the country. Since Madura Garments is also one of the largest branded suppliers in the market, a better integrated value-chain may provide it some margin advantage. However, it is likely to be also careful not to sour its position as a supplier to the other large format retailers through anti-competitive practices,” opines Devangshu Dutta, Chief Executive, Third Eyesight, a consulting organization for retail and consumer goods sector.
However, it would be interesting to see how competitors Shoppers Stop and Lifestyle react to this move. Further it would be also interesting to see whether the $35 billion (over Rs 180,000 crores) Aditya Birla Group, which has yet to stop losses in its food and grocery chain ‘More’, now sell it off to a potentially more viable food and grocery chain, in the same manner as Biyani.