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more to gain the most

Expected stake sale in Aditya Birla group's combined retail entity would sweeten the brand's valuation

Raghavendra Kamath  |  Mumbai 

If investors pick up a stake in a yet-to-be-formed combined retail entity of the Aditya Birla group as recently reported, the grocery and household goods chain, 'more', stands to gain the most. The expected deal would repay sizeable debt of the retail chain. Also, the synergies emerging from combining three retail businesses - 'more', Madura Fashion & Lifestyle and Pantaloons - would aid 'more's plans to focus on large-format hypermarkets by increasing its access to high-margin merchandise such as strong apparel and lifestyle brands.

Consultants say that 'more' has yet to break even while Madura, which is expected to be part of the deal, and deals with brand stores and distribution, is profitable. 'more's large base of around 497 supermarkets are said to be a drain on Aditya Birla Retail's profits.

Apart from supermarkets, the seven-year-old 'more' also has 16 hypermarkets (larger formats with diverse product categories ranging from apparel to deli food). Retail consultants say that its stores are making profits, though it is still in the red overall.

But if the group secures funding through the expected sale, it would be the chain's hypermarkets which would get a boost, as the more profitable format, and also because of the synergies possible as a result of Pantaloons and Madura coming into the same fold. 'more's operating company, Aditya Birla Retail posted losses of Rs 510 crore on net sales of Rs 1,037 crore in 2012-13.

Retail analysts and company sources say the group is expected to pay off debt it has taken for the chain. "It is not that the chain ('more') would get anything. They (Birlas) have funded the chain so far. If new capital comes in from PEs (private equity firms), they can repay 'more's debt," says a senior executive at an investor firm, who is considering the deal.

Though, the debt of the retail chain is not known, it was reported that the company has taken a Rs 500-crore loan from Yes Bank this year. Despite losses, the group, headed by chairman Kumar Mangalam Birla, has invested Rs 1,224 crore in 'more' in the 15 months, ending in June, 2013.

Recent reports mentioned PE funds such as L Capital, Temasek and IFC were in talks with the group to buy a stake in a proposed combined retail entity, while an Aditya Birla spokesperson declined to comment sayin it was market speculation.

Sanjay Badhe, a Mumbai-based retail consultant and former head of at Aditya Birla Retail, says that with the merger, 'more' can look at higher efficiency in operations and reduction in expenses such as human resource, and promotion expenses. 'more' would also get the benefit of merchandising from the proposed merger and stake-sale. That is where the focus on hypermarkets, that consultants point out is now being pursued by the company, will pay off. "Since it is focusing on hypermarkets, it can get synergies on general merchandise between 'more', Pantaloons and Madura," Badhe says.

A senior executive of an audit firm, who did not wish to be quoted, says that 'more' can benefit from the supply chain, logistics, vendors of Pantaloons and Madura. Merchandise from the apparel inventory of the latter two would bolster what 'more' has to offer at competitive margins for the chain. The auditor says, 'more' can also look at tapping customers who walk into Louise Philippe or Pantaloons' stores and benefit from the brand recall.

At the same time, Madura and Pantaloons, too, would gain from a common back-end, be it in logistics, vendor and the added distribution on 'more's shelf space. "If they come together, Madura's products can see higher sales throughput in 'more' and Pantaloons stores. If all the three come together, they can use each other's cash-flows to grow business and meet expenses," the auditor says. It also helps that all the three retail businesses have Pranab Barua as the common director, making a merger effortless and more efficient.

When Aditya Birla Retail launched 'more' in 2007, it was looking to break even by 2012-13 but to no avail. Though retailers like 'more', Reliance Fresh, Spencer's (RP-Sanjiv Goenka Group) expanded aggressively between 2006 and 2010, they had to exit unviable stores eventually. Aditya Birla shut over 150 'more' supermarkets in the past five years. While, 'more' was withdrawn from markets like Mumbai to stem losses in recent years, it strengthened its position in the south, after acquiring the South-based chain of stores, Trinetra.

However, clubbing 'more' with the group's better-performing retail chains would improve its brand appeal too. "If the group combines the loss-making units ('more' and Pantaloons) with the only profit-making division (Madura), the drag on the buyer will lessen and sweeten the deal. It will look positive," says Susil Dungarwal, founder, Beyond Squarefeet, a mall-firm.

Dungarwal says that since 'more' has a high capital investment and footprint compared to others, it would be an asset-rich company for investors and the brand would get better valuations than earlier. A recent CRISIL report shows that top food & grocery retailers, such as 'more', Hypercity (Shoppers Stop) and the grocery business of Reliance Retail, accumulated losses of Rs 13,000 crore in 2013-14. According to the agency's estimates, these retailers have invested about Rs 19,000 crore. Aditya Birla group's expected restructuring could give 'more' a leg-up amidst such competition.

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First Published: Mon, September 29 2014. 21:50 IST