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BW Businessworld

The Debt Drag

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Talks between Aditya Birla Nuvo (ABNL) and the Future Group have hit a bump over the purchase of the latter’s lifestyle retail format ‘Pantaloon’ because ABNL’s bankers have reportedly found the debt levels to be higher than what was presented. “We are renegotiating the deal because we had agreed to take on debt up to a level. But it is far higher than when we first spoke with their management,” says a source from ABNL.
Official sources from Pantaloon, however, say that there is no renegotiation on the Rs 1,600 crore that ABNL was to pay. The source added that there was a structure being created around the deal and a lot of details were being taken into consideration. “There is full commitment between both the parties.”
Three months ago, the debt-strapped Future Group found succour when ABNL decided to buy 86 Pantaloon apparel stores by subscribing to debentures worth Rs 800 crore, which  would later be converted into a 50.1 per cent majority stake as and when the store was demerged from its former business. The Aditya Birla Group (ABG) also decided to take on the Rs 800-crore debt on these stores on acquiring the majority stake. An email sent to the group regarding the deal structure was not answered .
A source from Pantaloon also said that because Pantaloon’s EBITA (earnings before interest, tax and amortisation) value fell 5 per cent short of the Rs 200-crore guidance in the June quarter, ABG will now own 48 per cent of the business. ABNL will make an open offer to own another 27 per cent by the end of this year.
KUMAR MANGALAM BIRLA-led Aditya Birla Group will gain entry to tier-2 and tier-3 towns once the deal goes through
(BW Archive)
Pantaloon has denied reports that the deal is being renegotiated because it failed to meet its EBITA guidance. Sources say that although the Future Group may in the end hold only 24.9 per cent in the business, it will still be managing the day-to-day operations of the stores.
Questions came to the fore when an audit of the stores indicated that there may be monies to be paid to creditors and suppliers that did not show in the books. “Also, the assets in Pantaloon were overvalued because inventory, a major asset in retail, is marked down by 60-70 per cent in eight months,” says a consultant familiar with the deal. Usually, a business values inventory at-cost in its books and not at marked down prices. The buyer has to sieve through the accounts before the purchase. So, no rules were flouted, and the seller always assumes a certain value to the business. “It is the due diligence process that shows the true nature of the debt and inventory,” says the consultant.
The Spoils
Pantaloon Retail India, Future Group’s listed entity, may get less than it expected, but ABG will gain entry to tier-2 and tier-3 cities through Pantaloon stores. ABNL’s teams have already started working with Pantaloon’s management to integrate the stores into ABG. “Pantaloon has great back-of-the-house operations; (and) logistics for sourcing inventory are sound. This allows our group to create an expansion strategy for the store; we have already made renovation plans in malls,” says a manager working on rebranding. 
Pantaloon has over 2 million sq. ft space, and the acquisition allows ABG to become an integrated retail player. Pantaloon will be its first multi-brand offering, which is very different to operate from single-brand stores such as Louis Phillipe, Peter England, Allen Solly or Van Heusen. Louis Phillipe is a marquee brand, and has a turnover of more than Rs 840 crore. Van Heusen’s turnover is over Rs 650 crore. “ABNL has never really been able to take Van Heusen or Louis Phillipe to smaller towns. But with Pantaloon, they will be able to take these brands as part of that total store value lifestyle offering,” says an analyst. 
While the auditing and due diligence process pressurises Pantaloon, ABNL, too, has to prepare to make an open offer to Pantaloon’s retail investors. The scrip has been trading close to its 52-week low of Rs 125 on the BSE.  
(This story was published in Businessworld Issue Dated 17-09-2012)