Pantaloon deal: Between a rock and a hard place

Report says Aditya Birla Nuvo is set to rework its deal after Pantaloon posted a sharp reduction in Q1 profit

The deal between Pantaloon Retail and Aditya Birla Nuvo seems to be jinxed. Earlier, the Competition Commission of India (CCI) rejected an application seeking approval for takeover of Pantaloon’s brand business by Aditya Birla Nuvo as the final deal was yet to be approved by the boards of the concerned companies.

Now a report in The Times of India says that Aditya Birla Nuvo is set to rework its deal after Pantaloon posted a sharp reduction in profit in June 2012 quarter. Though Rakesh Biyani, Joint Managing Director, Pantaloon has denied the news report on CNBC he agrees to the contours of the deal mentioned in the report.

It may be recalled the Aditya Birla Nuvo planned to acquire the demerged lifestyle stores of Pantaloon by pumping in Rs 800 crore as convertible debentures and picking up a similar quantum of debt. Lifestyle stores according to The Times of India report were valued at Rs 3,200 crore, which is almost two times its sales and 13 times its EBITDA (earnings before interest tax depreciation and amortisation).

At 13 times EBIDTA, Aditya Birla Nuvo was at the higher end of the valuation spectrum. It is no surprise then that a poor performance by the company in the June quarter would have prompted a re-look at the valuation.

Pantaloon says the report, had given a guidance of Rs 200 crore EBITDA for the June quarter. Though the company has not given division-wise break-up of sales and EBIT (earnings before interest and tax), it posted a sharp 78.6 per cent drop in net profit to Rs 22.71 crore in June 2012. Rakesh Biyani agrees that the deal was at 13 times of EBITDA of June 2012 quarter which was expected to be Rs 200 crore. And, if there is a change in EBITDA at the end of June 2012 (he did not disclose the exact figure) that multiplied by 13 times is the value of the deal.

Pantaloon has slipped further in the debt trap. Of its Rs 359.57 crore profit before interest but after depreciation, the company has paid Rs 323.68 crore as finance cost in June 2012 as compared to Rs 186.16 crore of finance cost on Rs 333.97 crore of profit before interest but after depreciation. The company desperately needs to deleverage and bring in money to sustain.

Only after a long search was Pantaloon able to find a suitor for its lifestyle business. There is little chance that it would let go of this opportunity and it may concede more in the renegotiations. This is bad news for Pantaloon shareholders who might either see lesser funds coming in the company or further equity dilution or debenture conversion. But this is still better than holding on to the lifestyle division and succumbing to the debt trap.