Retail Sector M&A

7/27/2019 Retail Sector M&A

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Mergers and Acquisitions in Retail Sector in India

India is a country of aspiring middle class and young population. The 300 million middle-class

individuals of India want products that are value-driven and 500 million individuals have access

to more money which has resulted in more demand for products. Indian customers have also

been ranked as one of the most confident in the world (Mastercard Worldwide Index of

Consumer Confidence). This has been due to numerous factors like- confidence in the strength

of the economy, personal finances, career growth etc. and has resulted in tendency to consume

more, purchase non-essential products, experiment with new products, brands, categories etc.

Moreover, not only the young, middle-class, urban population but also the 700 million rural

population of the country also is seen to present an opportunity to the retail companies that

cannot be ignored.

The Indian retail sector accounts for 20% of GDP in India and contributes 8% to total

employment. The current estimated value of the Indian retail sector is about 500 billion USD

and is pegged to reach 1.3 trillion USD by 2020. The 5% penetration level of modern retail is

likely to increase six-fold from the current 27 billion USD to 220 billion USD in 2020. Moreover,

this sector is expected to grow at a CAGR of 15-20%. Some of the causes driving this are-

Higher incomes leading to purchase of both essential and non-essential products New technology and lifestyle trends creating replacement demand Evolving consumption patters Increase in rural income as well as urbanization Consumer awareness and easy access to credit Growth of modern trade format across cities and towns Rapid urbanization and growing trend towards nuclear family

Key Players:

Pantaloon Retail Limited (Future Group Venture)


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Shoppers Stop (K Raheja Group Venture) Spencers Retail Lifestyle Retail (Landmark Group venture)

Bharti Retail Reliance Retail Aditya Birla More Tata Trent

Pantaloon Retail Ltd (Future Group ventureOn account of a poor performing manufacturing sector, Indias growth slowed down to nine-

year low 5.3% in quarter ending March 2012 and 6.5% in the fiscal year 2012-13. Growth is seen

to have been affected by economic slowdown originating from developed economies and suchadverse effect is seen to be short-term in nature. An OPEC report has suggested that the

medium outlook is seen to be more positive. Moreover, the inflationary effect on consumers

and retailers is negative as the current inflation is supply based rather than demand driven and

margins and sales are both under pressure.

However, rising consumer confidence, consumption based behavior, large pool of consumers,

increasing income levels and overall strong GDP growth are providing opportunities for global

retailers to invest in Indian market. Considering that India has youngest population in the world

growth of online retailers is seen to be inevitable, thus attracting financial investors to this

model. Largely deals are happening in the online segment of retail business, may it be apparel,

books, baby care or pharmacy.

According to PwCs Global CEO Survey, half of the CEOs of developed countries believed that

emerging economies are important for their companys future. In the past five years, retail

chain giants such as Walmart, Tesco and Metro Group, saw revenues in developing countriesgrow 2.5 times faster than their home markets. The embryonic stage of organized retail

penetration in India and the shortage of availability of cash for expansion is likely to prompt

more business activity in the sector. This has been the primary reason for the M&As in this

sector, especially in the e-commerce segment. In 2011, the e-commerce sector raised over 500


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million USD from 67 deals as compared to 2010 which saw only 18 investments worth 112

million USD. This was seen to be a result of a huge mass of Internet users, rising middle-class,

broadband penetration, 3G growth, improved payment gateways and logistics.

Recent deals:

Investor Investee Sector

SAIF Ventures Ink Fruit Online Apparel Site

Tiger Capital, Hellion

Ventures, Accel India

Letsbuy.com Online consumer durable

site

Fidelity Bigshoebazaar India Online shoe site for

wholesale purchases

Tiger Capital CaratLane.com Online Jewellery Site

Sequoia Capital India Lovable Lingerie Innerwear

Standard Chatered Private

Equity

Privi Organics Indian aroma chemical

products manufacturer

The FDI (foreign direct investment) policy framework has also been a prime driver of M&A

activity in India. Following the announcement of single brand retail policy in India, more than 60

foreign brands have set up retail operations in India by forming strategic joint ventures with

Indian partners. Examples-

Marks & Spencer with Reliance Retail Georgia Armani with DLF Fendi with Chordia Fashions Ferragamo with DLF


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Damas with Gitanjali Lifestyle Inditex (Zara) with Trent Burberrey with Genesis Color

S Oliver with Orient Craft

In January 2012, the government further liberalised the policy on single brand retail trading by

increasing the FDI cap from 51 to 100%, subject to certain conditions. This policy has opened

doors for further M&A activity. However, certain ambiguities in the policy have slowed the pace

of M&A activity, but it is expected to pick up as and when these uncertainties are ironed-out

with further liberalisation in the policy.

The multi-brand retail sector was first opened for FDI with a formal policy on wholesale tradingin the year 1997 (requiring government approval for 100% FDI). This was further liberalised in

2006 by placing the segment under automatic route. Since 2006, the FDI in wholesale trading

has been freely permitted. In April 2010, the government issued certain operational guidelines

for Indian companies with FDI engaged in wholesale trading activities. Some of the operational

guidelines have substantive impact on the M&A activities in this space. The key ones are as

follows:

Business customers need to have a government license or registration to act as such

Group company sales are to be restricted to 25% of wholesale turnover

However, in August 2013, the government relaxed FDI norms in multibrand retailing by easing

three main contentious conditions. These were- were on a mandatory 30 per cent sourcing

from small domestic industries, 50 per cent of the investment to be in back-end infrastructure

and outlets to be opened only in cities with population of more than a million. On the 30 per

cent sourcing, the government expanded the definition of micro, small and medium enterprises

(MSME), to include companies with a total investment of up to $2 million in plant and

machinery will also be eligible for such sourcing of manufactured and processed products.

Relaxation of the sourcing norm would not only help arrest loss of business for such Indian


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small industries that outgrew the eligibility but would also help retailers develop a robust

supply chain. Govt also eased the norms on back-end infrastructure investment. Under the

changed guidelines, that 50 per cent investment will be restricted only to the first tranche of

$100 million, the mandatory initial investment amount, while subsequent investments into

back-end will depend on the retailer. Finally, retailers are allowed to open stores in all states

that have agreed to implement FDI in multibrand retail, even if such states do not have cities of

more than a million population. States will now have a choice of city for the location of the

retail stores.

However, foreign investment in single-brand retail has failed to gain momentum despite hike in

FDI limit to 100% from 51% earlier, property consultant Knight Frank said in a report. The share

of foreign investment in single-brand retail out of the total FDI inflow into the country has

declined from 0.03% in December 2011 to 0.02% in June 2012.

A KPMG report suggested that, in times of economic slowdown Indian retail players should

partner with foreign retailers to bring in both capital and expertise. It also suggested that,

retailers can consider entering into an alliance with- a retailer from the same channel, a retailer

from a different channel, vendors and back end service providers like third party logistics

players and IT service providers. Alliances enable retailers in entering new markets, categories,

expanding value proposition and capturing new consumer segments. While globally, its a

common trend, Indian retailers are slowly recognizing the importance of such partnerships and

therefore actively seeking for opportunities to unlock value.

Some of the ways in which retailers have formed alliances with foreign players are-

By tapping new customer segments:i) Reliance retail has tied up with Pearle Europe to launch a range of optical stores in

India

ii) Spencer retail has tied up with Woolworths for marketing its Chad Valley range oftoys for tapping the kids segment in India


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By expanding into new categoriesi) Future Group is leveraging Blue Foods expertise in food and beveragesii) Spencers entered into partnership with specialists like Sankalp, Rajdhani, Yo China

and Singapore based Bread Talk to open chain of food outlets in its stores

By entering into new geographiesi) FabIndia has acquired a 25 percent stake in UKs bohemian women wear retailer

EAST, to help FabIndia sell its garments in UK

ii) AB retail acquired 90 percent stake in Trinethra from Value Funds to gain a strongretail footprint in South India

By enhancing value propositioni) Shoppers Stop has entered into an alliance with Mothercare UK to expand its value

proposition in mothercare and kids wear section

ii) Trent has entered into a joint venture with Inditex Group to develop and promoteZara stores in India and leverage on Zaras international experience

Currently, most e-commerce companies and multi-brand retail trading companies have

adopted B2B route for raising foreign capital or formed strategic joint ventures with foreign

retailers.


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Spin-off of Pantaloons Retail to Aditya Birla Group

Pantaloons Retail (India) Ltd. (PRIL)

PRIL is a leading Indian retail major with presence across most sectors of organized retail. It is the

flagship company of the Future Group which has interests over retail, fashion, financial services, food,

FMCG and others. PRIL operates hypermarkets and supermarkets such as Big Bazaar, Food Bazaar,

Home Town, eZone, etc. and also other fashion retails formats such as Central, Brand Factory, Planet

Sports, aLL, etc. It also has investments in insurance through Future Generali, financial services through

Capital First Ltd., Future Media, Staples Future and others.

In December 2012, pursuant to a scheme of arrangement, PRIL sold its Pantaloons format business

along with the brand name of Pantaloons to Peter England Fashions and Retail Ltd. (wholly-owned

subsidiary of Aditya Birla Nuvo Ltd.) in order to reduce its debt. Post the scheme of arrangement, the

company has applied for changing its name to Future Retail (India) Ltd.

PRIL Brand Portfolio

Aditya Birla Nuvo Ltd. (ABNL)


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Aditya Birla Nuvo Ltd. (ABNL), a USD 4.5 billion conglomerate by revenue size, is part of Aditya Birla

Group, a USD 40 billion Indian multinational. Having a market cap of about USD 2.5 billion as on 30th

November 2012, ABNL is present across Financial Services, Telecom, Fashion & Lifestyle, IT-ITeS and

Manufacturing businesses.

Why Spin-off?

Debt-laden Pantaloon retail had been counting on the federal government opening up of the multi-

brand retail sector to foreign direct investment as part of a plan to bring in overseas capital to help

corner a bigger share of Indias estimated $500 billion annual retail market. But its plans were thwartedwhen the Congress-party led federal government reversed its decision at that point of time to allow

retailers like Walmart store & Carrefour to set up shops in India in partnership with local firms after

heavy political flak.

Key Indian players in the organized retail sector (approx. 8% of overall retail sector) are as follows:


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Company Name Annual Revenue (Crores INR) Company Name Market Cap (Crores INR)

Pantaloon Ret 4325 Pantaloon Ret 4701

Shoppers Stop 1929 Shoppers Stop 3022

Koutons Retail 1204 Trent 2463

Brandhouse 737 Kewal Kiran 875

REI Six Ten 717 Provogue 284

Trent 686 REI Six Ten 249

Provogue 562 Brandhouse 72

Kewal Kiran 234 Koutons Retail 63

Cantabil Retail 186 Arunjyoti Enter 57

Arunjyoti Enter 79 Cantabil Retail 26

Some analysts had expressed

concern disappointment that

Future Group had lost its

competitive edge in the fashion

space. The transaction saw 65Pantaloons Stores & 25

Pantaloons Factory outlets

being transferred to Peter

England Fashions, a unit of
http://indiansecurities.wordpress.com/2011/12/02/india-overview-of-the-retail-sector/retail-m-cap/


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Aditya Birla Nuvo, a company that houses most consumer-facing businesses of the K. M. Birla held

conglomerate.

Some of the following facts & figures back the decision of spin-off:

Group laden with consolidated debt of Rs. 6000 Crores. FY11 Standalone Balance Sheet: 2,173.12 Cr debt. D/E ratio = 0.82, which they wanted to reduce to 0.54

Post-merger, the holding of ABNL in PRIL through its subsidiary PEFRL will be 50.09%. PRIL with ABNL

had the deal with a share swap ratio of 1:5.

Some of the other measures which Future group decided to take in near future in order to curb the debt

are:

Finalized plans to exit from stationery joint venture with US-based staples by selling its entirestake to the partner for upto Rs. 170 crores.

Mulling stake sale in Future Generali Insurance, a JV with Italian insurer Generali Group. May hive off part of its 70% stake in Future Supply Chain (FSC), a supply chain management firm.

The remaining 30% is held by Hong Kong based Li & Fung which is also interested in hiking its

stake in the company.

Moreover they have already sold majority stake in the Future Capital holdings to private equityfirm Warburg Pincus for Rs. 560 crores.

The action plan

Aditya Birla Nuvo Ltd (ABNL), part of Kumar Mangalam Birla-led group, through a subsidiary has

proposed to acquire a majority of Pantaloon format business from Kishore Biyani-led Future group. The

proposed combination relates to acquisition of business of Pantaloon Retail (India) Ltd (PRIL) by ABNLthrough the latters subsidiary Peter England Fashions & Retail Ltd (PEFRL).

The Competition Commission of India (CCI) had in August termed as invalid an application seeking nod

for this takeover deal as the final deal was yet to be approved by the boards of the concerned

companies at that time.


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In late April, Future Group had said that Aditya Birla Nuvo would infuse Rs.1,600 crore into its flagship

Pantaloon and would acquire a majority stake in the store chain, which would be later demerged to be

listed as a separate entity. As a part of the deal between the two companies, the Pantaloon format

would be demerged from PRIL. A diversified entity, ABNL through its division Madura Fashion &

Lifestyle manufactures and sell apparel, footwear and accessories under various brands such as Louis

Philippe, Van Heusen and Allen Solly.

ITSL, a subsidiary of ABNL, is the parent company of PEFRL (Peter England Fashions & Retail Ltd).

Meanwhile, PRIL (Pantaloon Retail (India) Ltd) is a listed company with presence in retail fashion and

lifestyle business, among others. Going by estimates, the organised Apparel, Footwear and Accessories

(AFA) retail market is worth about Rs.42,500 crore, out of which the shares of PRIL and ABNL is stated

to be small.

The Commission also noted that, among others, recent liberalization of foreign direct investment (FDI)

norms in single and multi-brand retail trading would further enable many international AFA brands to

compete in India more vigorously. Billionaire Kumar Mangalam Birla had announced buying a 50.1%

stake in Pantaloons for Rs 800 crore in cash while taking on a similar quantum of debt. The deal entailed

Kishore Biyani-controlled Pantaloon Retail India (PRIL), with diversified retailing interests, demerging

lifestyle stores into a separate entity. Aditya Birla Nuvo planned subscribing Rs 800 crore debentures of

PRIL, to be converted into equity of the demerged business, besides assuming the debt.

This would have pegged enterprise value of Pantaloons stores at Rs 3,200 crore, almost two times

topline revenue and 13 times EBITDA, which some analysts tracking the sector argued was on the higher

side. The structuring would have seen Birla acquiring over 25% direct stake and making a mandatory

open offer for additional 26% leading to majority control.

As per the notice, ABNL and PRIL are not entering into any non-compete arrangement and the latter

would continue to compete in the apparel, footwear and accessories business through various other

stores. Meanwhile, as part of the proposed transaction, ABNL (Aditya Birla Nuvo Ltd) would subscribe to

debentures amounting to Rs.800 crore issued by PRIL and on completion of the demerger process, the

debentures would convert into equity in the demerged entity of the Pantaloon format. Further, ABNL

would take care of Rs.800 crore debt of Pantaloon. The notice seeking approval for the deal was jointly

moved by ABNL, PEFRL, Indigold Trade and Services Ltd (ITSL) and PRIL.


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Merger of Pantaloons Retail India Ltd. & Future Ventures India Ltd.

The stock of Pantaloons Retail India Ltd (PRIL) fell by 24% since April 30, 2012, after Kishore Biyani, the

Future Group's promoter, announced that PRIL's fashion business would be demerged and sold to theAditya Birla Group. The benchmark index Sensex climbed 2.5% during the same period.

Source: Economic times

The key highlights of the merger are :

Pantaloons Retail India Limited (PRIL) and Future Ventures India Limited (FVIL) through aComposite scheme of arrangement plans to demerge its fashion business into PRILs wholly

owned subsidiary Future Lifestyle Fashions Limited (FLFL).

Simultaneously, FVIL also plans to demerge its fashion business (including its subsidiaries Indus-League Clothing Limited (ILCL) and Lee Cooper (India) Limited (LCL) into FLFL post

consolidation of the ILCL and LEE businesses with FVIL.

Shareholders of PRIL and FVIL are to receive shares in FLFL which will seek automatic listing of itsshares post the Scheme of Arrangement and Amalgamation.

FVIL to emerge as a separate operating company through a separate scheme of arrangement.FVIL will also undergo a capital reduction by reducing its face value of shares from Rs 10 to Rs 6

to reflect the size of the remaining business without any change in number of shares

outstanding.

The rationale of the proposed arrangement is to simplify the group structure, unlock value forShareholders reduce administrative costs and achieve operational and managerial efficiencies.

The resulting entity (FLFL) will have Proforma estimated revenues of Rs. 3,100 cr. as ofDecember 2013 with a total retail space under coverage of approx. 3.5 msf.

Demerger of Fashion Business of PRIL and FVIL


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The scheme of arrangement is primarily aimed at consolidating the fashion business of PRIL and FVIL in

to a new listed entity called FLFL(Future Lifestyle Fashion Limited)

Demerger Graphical Representation

Demerger

Demerger Share Allotment share Allotment

Post the scheme, there will be 3 separate listed entities;

Pantaloons Retail India Ltd (to be renamed as Future Retail India Ltd) having the hypermarketand supermarket businesses of Big Bazaar, Food Bazaar, Home Town, eZone, etc.;

Central Brand

Factory, all,

Planet Sports

Public

PRIL

Promoters

Big Bazar, Food

Bazar, Hometown

,e-zone

Future Lifestyle Fashions

Promoters PRIL

Public

FVIL

Indus-League,

BIBA,Holli,LEE,Tut

rle,CELIO

Food , FMCG and

Others



Central Brand

Factory, all,

Planet Sports

Indus-League,

BIBA,Holli,LEE,Tut

rle,CELIO


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Future Ventures India Ltd having food and FMCG businesses of Future Consumer Enterprises,Future Consumer Products, Aadhar Retail, Capital Food Exports, etc., and

Future Lifestyle Fashions Ltd having the fashions businesses of PRIL and FVILThe Final Structure Post Arrangement

Step 1 :Demerger of fashion business of ILCL and transfer to FVIL

FVIL holds 95.29% and other shareholders hold 4.71% stake in ILCL. The fashions business of ILCL (which

includes fashions brands retailing business and its 100% subsidiary LEE) will be demerged and

transferred to FVIL. As a consideration, FVIL will issue and allot 21,732,971 equity shares to the

shareholders holding 4.71% based on 3 month average closing price of FVIL.

FVIL's allotment of shares to 4.71% shareholders of ILCL 21,732,971

3 months average close price per FVIL share (Rs.) 9.88

Value of the shares allotted (Rs. Cr.) 21.47


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Step 2 Demerger of Fashions Business of PRIL and FVIL and Transfer to FLFL:

After the merger of ILCLs fashions business and LEE into FVIL, the fashions business of PRIL and FVIL

Will be demerged and transferred to FLFL. As a consideration, FLFL will issue and allot shares to PRIL in

the ratio of 1:3, i.e., 1 share of FLFL for every 3 shares of PRIL, and to FVIL in the ratio of 1:31, i.e., 1

share of FLFL for every 31 shares of FVIL.

FLFL is presently a 100% subsidiary of PRIL. As of September 30, 2012, PRIL held 250,000 shares in FLFL

Subsequent to which FLFL issued 25,481,399 shares of Rs.2/- each to PRIL taking the total shares held by

PRIL in FLFL to 25,731,399 shares. These existing shares will not be cancelled pursuant to the scheme

and hence PRIL will hold 16.66% in FLFL (in lieu of their current FLFL holding) post the scheme.

FLFL Shareholding:

FLFL Shareholding:

Outstanding Shares Swap Ratio FLFL Shares

FVIL 1, 597,976,61 1:31 51,547,635

PRIL 231,582,591 1:3 77,194,197

PRIL Existing Stake - - 25,731,399

FLFLs Final Outstanding Shares 154,473,231

As per street estimates, the fashions business of PRIL has an EV of approximately Rs. 3,200 cr. and adebt of Rs. 1, 200 cr. and the fashion business of FVIL has an EV of approximately Rs. 1,200 cr. with a

debt of Rs. 200 cr. Post the scheme of arrangement, the resulting listed entity (FLFL) will have an EV of

approximately Rs. 4,400 cr. and debt of approximately Rs 1,400 cr. implying an equity value of around

Rs. 3,000 cr. Considering total outstanding FLFL shares of 154,473,231 will imply a per share price of

close to Rs 194/- for FLFL.

The resulting FLFL will have estimated revenues of Rs. 3,100 cr. and operate 22 Central, 20 Brand

Factory, 81 Planet Sports and 68 aLL stores. It will also own a portfolio of 24 brands across 121 cities

under a total retail space of 3.5 mm sq. feet.

Benefits of the Merger

Creation of a transparent and simplified business structure with:


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PRIL in hypermarket and supermarket business, FLFL in fashions business and FVIL in food and FMCG business.

Creation of financial flexibility for each of the companies by enhancing their ability toattract separate investors.

Unlocking of value for shareholders of both PRIL and FVIL as they get shares in a separate listedfashion business in addition to shares they continue to hold in other businesses.

Attribution of appropriate risk and valuation to the fashion business based on its risk-return profile and cash flows.

Greater visibility on the performance of fashion business. More focused leadership and dedicated management.

Deleveraging of PRILs debt by transfer of debt of Rs. 1,226 cr. to FLFL. Future Fashion will haveStrategic / noncore investments that may be monetized to further reduce leverage

Dilution of direct voting rights of minority shareholders of PRIL and FVIL in FLFL

As of December 31st 2012, promoters hold 44.19% in PRIL (equity and DVRs) and 38.25% in FVIL

respectively, whereas public shareholders hold 55.81% and 61.75% in PRIL and FVIL respectively. Post

the scheme of arrangement, promoter group entities and PRIL will together hold 51.33% in FLFL.

Retail Sector M&A

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