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Aditya Birla Co To Buy Pantaloon In Rs 800-Cr Deal

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It is a marriage of two companies with their business roots firmly entrenched in Kolkata. The $4-billion Aditya Bitla Nuvo has acquired a part of Pantaloon Retail India Limited's lifestyle business called ‘Pantaloon'. Eighty-six such stores will now form part of a new entity, controlled by Aditya Birla Nuvo (ABN), which will be automatically listed on the BSE and the NSE.

A source from the Future Group added that ABN has for the moment acquired a minority stake by infusing Rs 800 crore through debentures, which will be converted to equity when the new entity is formed, where ABN will have a majority stake of 50.1 per cent. ABN will have the majority stake only after it makes an open offer to the shareholders of Pantaloon Retail India Ltd (PRIL). ABN will also infuse another Rs 800 crore to service the debt of Pantaloon. Both groups which are being advised by JM Financial are yet to decide the swap ratio that will determine the shareholding in the new entity. The word on the street is that PRIL will own 25 per cent in the new entity and will manage the operations of the 86 stores whose turnover is expected to touch Rs 1,700 crore this financial year ending June 2012.

More importantly it means that Rs 1,600 crore of debt will be wiped out from the balance sheet of PRIL, which has a debt of Rs 5,256 crore. "This is the first of the many steps to wipe off the debt in the Future Group," says Devengashu Dutta, CEO of Third Eyesight.

According to SMC research the retail industry gathered new momentum during the year 2011. Different international brands were established. New shopping malls and department stores were seen sprouting across the country. In terms of growth, the organised retail segment in India is projected to be 9 per cent of total retail market by 2015 and 20 per cent by 2020. ABN's business generates $ 4 billion in revenues, but its lifestyle business generates only $400 million in revenues.

Madura Fashion and Lifestyle is the largest premium branded apparel player in India. Louis Philippe, Van Heusen, Allen Solly and Peter England are the brands retailed through 1,082 exclusive brand outlets spanning across 1.6 million square feet of retail space. These brands are also retailed in more than 1,250 departmental stores and multi brand outlets. It has a strategic distributorship tie-up with leading brand Esprit and retails international brands under ‘The Collective', a luxury store. But the day-to-day management of the new entity will be run by Pantaloon's management team. Rakesh Biyani and Kailash Bhatia will continue to manage the business and a "Fashion Council" which will have the best talent from Madura Garments and Future Group will aid and advise the management with the objective to fully leverage the strengths of Madura Garments and Pantaloon.

This buyout will allow ABN to access markets where it was previously absent. Pantaloon is well suited for tier II and III towns. "The exponential growth experienced by retail sector is not just limited to the major cities," says D K Aggarwal, MD of SMC Investments in Mumbai. He adds that the growing population and urbanization provides a huge market for organized retail. But why sell stake in a venture that was highly profitable for the Future Group and which had the highest concentration of private label in the business? "The rising debt levels of Pantaloon have been impacting the growth of the Group," says Aggarwal of SMC. He adds that they have been paying about 60 per cent of their revenues as interest cost. This move is a bit surprising because the company had indicated rationalizing its non-core business and other JVs. But Pantaloon, due to its cash crunch was not able to grow its topline. This shows that Kishore Biyani, the MD of PRIL, had to sell one of his jewels which he essentially nurtured since 1997.

But some analysts call this a clever move by Mr Retail because retaining management control of the new entity will allow Kishore to continue his quest to win the Indian shopper. And this time with the help of the $35 billion Aditya Birla Group he can keep his story of making history in the Indian retail market intact.