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Pantaloon Retail’s de-merger will help reduce its core retail debt. But does that make it a good investment now?

What will be the implication of demerger of Pantaloons?
-Pankaj

Pantaloon Retail (India) Ltd. (PRIL), a flagship company of Future Group, recently announced the de-merger of its apparel retail format Pantaloons which will be subsequently listed later on. Aditya Birla Nuvo will invest in the de-merged entity by subscribing to debentures issued by the company. The debentures, in turn, will be converted into equity in the de-merged entity on the completion of demerger process. Aditya Birla Nuvo will also make an open offer of 26 per cent for the de-merged entity. Pantaloons retail format accounts for around 14 per cent of sales and nearly 20 per cent of EBITDA of PRIL's core retail operations.

The deal will help PRIL to reduce its core retail debt by Rs 16 billion. PRIL core retail debt was around `58 billion (including convertible debentures) as on December 2011.

High leverage has been the key concern for the company and the management has been trying hard to explore various options to pare down the debt. This transaction will help lower the investor concerns to some extent but would lead to another. With the management's decision to divest its more profitable format to raise money, PRIL will be left with low margin businesses which will command a lower valuation. However, with limited disclosures available about this transaction, expected to completed over next 4-5 months, one cannot take a clear stance. So wait till you get more clarity on the transaction.



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