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Birla sees future in Biyani's fashion biz

In one of the largest consolidation moves in the Indian retail space, the Aditya Birla Group is buying a controlling stake in Kishore Biyani's apparel retail and fashion stores.

Biyani - the rajah of Indian retail - will in the process get a much needed breather and deleverage his already stretched balance sheet, while the Aditya Birla Group in one go would get to the pole position in the branded fashion space, with a nationwide presence.

Pantaloons, launched in 1997, is the largest fashion retailer in the country.

Fashion is also a key pillar of Biyani's retail empire, which has three main foundations or business verticals.

The first is the value retail format, which houses Big and Food Bazaars, KB's Fair Price, Aadhar and Brand Factory. Under home retail come Hometown and E-Zone. Finally, under Lifestyle are the fashion formats, Pantaloons Stores, factory outlets and Central.

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Birla sees future in Biyani's fashion biz

Biyani is already in the middle of a larger group restructuring exercise to trim debt by Rs 2,500 crore (Rs 25 billion) and infuse Rs 1,500-2,000 crore (Rs 15-20 billion) equity over 12-18 months.

For the moment, he has inked a strategic deal involving only the Rs 1,700-crore (Rs 17 billion) fashion arm. The structured deal will be carried out in phases over 8-10 months.

To begin with, Pantaloons' apparel and fashion retail stores under its eponymous brand name and the factory outlets will get demerged from the listed flagship Pantaloon Retail India Ltd (PRIL) into a separate entity.

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Birla sees future in Biyani's fashion biz

PRIL will issue debentures worth Rs 800 crore (Rs 8 billion) to Aditya Birla Nuvo Ltd (ABNL), a diversified $4-billion Birla group company with interests in fashion and BPO. Nuvo's fashion business and garments arm is Madura Fashion & Lifestyle, which owns marquee brands and retail formats like Allen Solly, Louis Philippe, Van Heusen and The Collective.

PRIL will also transfer the net assets of its business, its apportioned debt of Rs 800 crore, as well as the debentures to this new entity.

After the demerger, these debt instruments will get converted into equity shares of the new company, which will also be listed separately.

ABNL will then raise stake up to a minimum of 50.01 per cent through an open offer. Biyani's own stake will come down to 25 per cent from the current 44 per cent.

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Birla sees future in Biyani's fashion biz

Eventually, it will become a subsidiary of ABNL.

However, there will be a continuation in the management team, with Rakesh Biyani and Kailash Bhatia, directors at Pantaloon Retail, continuing to run the business.

A Fashion Council, comprising top executives from Madura and Future Group, will advise the new entity's management. Both Madura and Pantaloons will work closely as partners to derive operational synergies.

JM Financial under Vishal Kampani advised on the deal.

Investors cheered the news. Even though the ABNL stock remained flat at Rs 933/share on the BSE, Pantaloon Retail shares shot up 9.25 per cent to Rs 187.75/share in an otherwise stable market.

For the Birlas, this is the second such inorganic step to increase their footprint. In early 2007, they had acquired Trinethra Super Retail Ltd from India Value Funds for an undisclosed amount.

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Birla sees future in Biyani's fashion biz

Kumar Mangalam Birla, chairman of the $35-billion Aditya Birla Group, said: "The proposed acquisition is in line with our strategic intent to be on top of the league and to create the largest integrated branded fashion player in the country through an extension into the value segment."

Kishore Biyani, founder and group CEO, Future Group, added, "This marks a unique coming together of brands and enterprise that will create significant value for customers, suppliers and all stakeholders."

Biyani's balance sheet will certainly get a lifeline with this deal. The combined core retail debt of a little Rs 5,000 crore (Rs 50 billion) will come down by Rs 1,600 crore (Rs 16 billion). This is in sync with his plans to realign group operations and explore several value-creation opportunities through stake sales, JVs and in some cases exits from non-core businesses.

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Birla sees future in Biyani's fashion biz

Biyani is also looking at finalising a deal with Japan's Mitshubishi Corporation and Lawson for his disparate food sourcing, manufacturing and distribution business units. Similar stake sales are also planned in the home and electronics retail businesses. Future Group is also exploring a majority sale in Future Capital, its NBFC arm.

"Reduction of debt is definitely positive but since fashion has higher margins, the overall margins of the Future group could come down, which needs to be calculated. Though the retailing area will come down, operating expenses will also correspondingly decrease," said Rikesh Parikh, vice-president, market strategies, at Motilal Oswal Securities.

The Birla Group will be able to further its forward integration into fashion retail. Madura already has over a $1-billion valuation and generates total sales of Rs 2,145 crore (Rs 21.45 billion) from its 1.6-million square foot of retail space.