Birla's merger of Madura and Pantaloons will create India's largest apparel giant

The merger of all branded apparel businesses of the $40 billion Aditya Birla Group into one entity, announced on Sunday afternoon, will give birth to what chairman Kumar Mangalam Birla called "the largest pure-play fashion company by far" in India.

Under the scheme of arrangement, approved on Sunday by the boards of respective companies, the apparel businesses of group holding company Aditya Birla Nuvo Ltd (ABNL) and of another group firm Madura Garments Lifestyle Retail Co Ltd (MGLRCL) would be demerged, and then merged into listed firm Pantaloons Fashion & Retail Ltd (PFRL).

The vertical demerger, done through an all-share deal, will create a new listed entity -- Aditya Birla Fashion & Retail Ltd (ABFRL) post the completion of this consolidation exercise six to nine months from now.

"The new company (ABFRL) will by far be the largest such entity in this sector. It will have presence across formats and categories and chalk out aggressive growth plans," said Birla, adding that the move brings India's number one branded menswear and womenswear players together.

While AB Group executives refrained from sharing valuation related details of the combined entity, industry experts pegged it to be around Rs 12,000 crore. The merged entity will have 1,869 stores spanning around five million sq ft of retail space and a combined turnover of Rs 5,290 crore. As for debt, around Rs 473 crore would be transferred to the new entity, taking the total consolidated debt to be little under Rs 1,800 crore.

Interestingly, Kishore Biyani-led Future Group's stake will go down to around 2.5% from the existing 18% it owns in Pantaloons Fashion & Retail. So is there any possibility of AB Group buying out Biyani's stake in the merged entity?

Senior company executives denied any such possibilities, saying that it would not be required. "On their part, Future Group can either continue (with their holding) or divest it as per their priorities," said an executive.

The consolidation will see operations of Madura Fashion (a branded apparel retailing division of ABNL) and Madura Lifestyle (a luxury branded apparel retailing division of Madura Garments Lifestyle Retail Co Ltd - MGLRCL) being merged into PFRL. Once completed post statutory and regulatory approvals including approvals of the respective high courts, the listed entity Pantaloons Fashions will be renamed Aditya Birla Fashion & Retail Ltd (ABFRL).

Birla said the consolidation will enable tapping of operational synergies on various fronts such as sourcing, real estate and technology platforms. In addition, it will help the group unlock value for the shareholders by giving them an opportunity to participate in the promising fashion space directly through the new listed entity.

He, however, denied plans of bringing any other retail entities (grocery retailing business under the banner 'More') or for that matter, strategic investors into the new company.
"The business is very profitable and does not require raising of funds whatsoever. The merged entity will capitalise on strong brand portfolio of Madura and Pantaloons while also pursuing multiple opportunities to build brands in women, kids and menswear categories going forward," said Birla. On the group's e-commerce initiatives, he said they continue to explore opportunities in the online space but have nothing concrete to share at the moment.

The apparels category, company executives said, is the largest contributor to the organised retailing market in India which is expected to grow at a robust CAGR of 18% over next few years. Tapping this opportunity, the merged entity will add approximately 230 new stores in the current fiscal attracting a capital expenditure of between Rs 250 to Rs 300 crore.

As a result of the consolidation, shareholders of ABNL will get 26 new equity shares of PFRL for every five equity shares held in ABNL pursuant to the demerger of Madura Fashion.

The swap ratio for shareholders of MGLRCL will involve seven new equity shares of PFRL for every 500 equity shares held in MGLRCL pursuant to the demerger of Madura Lifestyle. And preference shareholder of MGLRCL will get one new equity share of PFRL.

Post completion of the exercise, ABNL (with 9.06%) and AB Group (with 51.1%) will hold a little over 60% in ABFRL and the balance 39.84% will be held by public shareholders.

Pankaj Jaju, group head - strategic corporate group, Axis Bank, one of the advisers to the deal, said, "The merged entity has brands, owned retail and some multi-brand retail. The positioning of the company is of an end-to-end integrated fashion retail business with large value coming from own brands, private labels, selling through exclusive brand outlets (EBOs), multi-brand outlets (MBOs), speciality retail and departmental store.

We don't have numbers from Reliance Trends. Other listed entities in the space like Shoppers Stop, Trent etc are multi-brand retail and are operating in a different format altogether.

Then there are Arvind Brands, fashion brands from Raymond, Kewal Kiran, Monte Carlo and Indian Terrain which are either too small or are divisions of larger entities and hence cannot be compared. In the case of Page Industries it's in the lingerie space and not susceptible to the same fashion cycles."