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Pantaloon Retail’s growth was fuelled only by debt. Unable to play this dubious growth game any longer, it will reduce Rs1,600 crore of debt by selling Pantaloon stores. Without debt or positive cash flows, will Pantaloon’s growth now come to a logical halt?
Pantaloon Retail India (PRIL) has been growing through continuous injection of a steroid called debt. All expansions of the Big Bazaar and other brands have been done with the hope that the cash flows would pay for the debt taken to fund such expansion. Cash flow failed to materialise because of the flawed business model of large format in Indian retailing. Apart from low margins, high costs, limited access to stores, PRIL was beset with indifferent quality and therefore low customer loyalty. Pantaloon never got out of this rut, forcing the company to go for more expansion through more debt-leading to negative cash flows.
Pantaloon Retail played this game for years. But obviously running on negative free cash flow has its limits. Pantaloon has finally thrown in the towel and has to turn the clock back. It is selling Pantaloon fashion stores to Aditya Birla Nuvo which owns Madura Garments to reduce the debt by Rs1,600 crore.
According to a press release, it will invest Rs800 crore in debentures, for a "controlling" stake in Pantaloons Format Business (PFB), which will later get converted into equity shares. The remainder of Rs800 crore will be debt in the new entity, which will be borne by Madura Garments. The existing shareholders of PRIL will continue to own shares in the PFB. Post-merger, the total debt of Pantaloons will reduce by Rs1,600 crore, said the press release. Reacting to this selloff, PRIL stock price has risen 9.25%-after losing 63% of its value since June 2011.
The other parts of the Pantaloon Group, excluding Pantaloons, will be continued to be controlled by PRIL, and managed by Rakesh Biyani and Kailash Bhatia. Regarding the new demerged entity, it is proposed that a "Fashion Council", whatever that means, will be formed to advise the management of the new demerged entity.
But the deal with Madura is only for Rs1,600 crore. This is a far cry from the Rs4,209 crore PRIL owes to its creditors, in the form of loan debt as well as current liabilities, as per Q2 results that were announced in December 2011. However, analysts believe that is much larger than this figure. Some say it is Rs5,700 crore, on a gross basis. Mr Biyani has merely postponed much deeper restructuring of debt and the business. It is going to be very tough for this ambitious promoter who penned a so-called bestseller only last year.
PRIL's debt is like a huge fire, which is slowly burning away its net-worth. Consider this simple data. The interest cost alone ate up 90% of its profit before tax of Rs270 crore during the December 2011 quarter, on a consolidated basis. The company did not divulge its debt details during the conference call with analysts.
Of course, a Mint article today gives a PR spin to this desperate debt reduction plan arguing that the Pantaloon promoter wants to be debt-free even though more and more debt is all he wanted all these years! The PR spin ignores that a debt-free PRIL will look so emaciated that it will not be able to survive too long without an equity partner. Clearly, Mr Kishore Biyani's PR team has done an excellent job.
The debt around Mr Biyani's neck was contracted by expanding into several verticals, with the hope of being the next Wal-Mart. Over the years, it saddled itself with massive loans and expanded rapidly, hoping that consumers would shop continuously. Recently, it has had difficulty in servicing its loans. Rather than scale back, or completely overhaul its business, by disposing off some of its non-core assets, it expanded further, buying and taking real estate on lease. It disclosed that it added 1.49 million sq ft of space the first half of its accounting year 2011-2012 (it follows the June accounting calendar), taking the total retail space to 16.3 million sq ft. Whatever happened to debt-reduction? The share price has been battered precisely because the markets were pessimistic about its ability to stay on this debt treadmill.
Pantaloon has been desperate to stay in the game by finding a suitor to service and get rid of its gargantuan debt. It finally got one. But will this move help itself service the remainder of the debt and cause a turnaround?
Without the debt PRIL desperately needs another source of long-term capital. And there is only one other possible source-equity. No wonder Mr Biyani, who once told Moneylife editors that he has nothing to learn from Wal-Mart and can actually teach Western retailers a thing or two, was pushing hard for Foreign Direct Investments (FDI) in multi-brand retail. This did not happen because in India nothing happens smoothly. Indeed, PRIL now plans to issue 'preferential shares' to certain persons and entities. It will consider this move during the board meeting on 3 May 2012. According to Bombay Stock Exchange filings, a board meeting is planned to consider, discuss and approve the following:
1) Issue of equity shares/debentures/convertible securities/warrants convertible into equity shares of the company to the investors on preferential basis as per the SEBI guidelines
2) To fix up the date, time and venue of the extra ordinary general meeting of the members of the company for obtaining approval and deciding realignment process and/or preferential issue price and persons
3) Approving notice for EGM to take the above items to shareholders
Let's hope Mr Biyani, unlike Vijay Mallya, finds investors to keep the game going.
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