Aditya Birla Fashion & Retails Scheme to undo its consolidation

Corporate Restructuring saga continues for the Aditya Birla Group. Recently, the board of directors of Aditya Birla Fashion and Retail Limited announced a vertical split by separating Madura Fashion and Lifestyle business (MFL Business) from ABFRL into a newly incorporated company.

Aditya Birla Fashion and Retail Limited (“ABFRL” or “Demerged Company”) is a part of a leading Indian conglomerate, The Aditya Birla Group. ABFRL runs a diverse portfolio of fashion brands and retail formats with key business segments comprising Madura Fashion and Lifestyle and Pantaloons, Ethnic portfolio along with other new growth platforms. The equity shares of the Demerged Company are listed on the Stock Exchanges and Non-Convertible Debentures are listed on BSE Limited.

Aditya Birla Lifestyle Brands Ltd. (“ABLBL” or “Resulting Company”) is incorporated recently to facilitate the proposed demerger. Currently, ABLBL is a wholly-owned subsidiary of ABFRL.

Past Restructurings

The garment business of Aditya Birla Group has already undergone major corporate restructuring in the past.  

In 2010, the domestic garment business of the company was demerged to Aditya Birla Nuvo Limited. In 2013, Aditya Birla Group has taken over Pantaloons from Future Group through a demerger. It was marked as one of the largest acquisitions (through demerger) in the Indian fashion industry.

In 2015, Aditya Birla Group consolidated entire garment business by demerging the branded apparel manufacturing and retailing division of Aditya Birla Nuvo Limited (Madura Fashion and Lifestyle) and the branded apparel retailing business of Madura Garments Lifestyle Retail Company Limited (Madura garments lifestyle) into ABFRL. Interestingly, the current scheme is effectively to undo what was done pursuant to this scheme.

Last year, ABFRL announced the acquisition of 51% of the equity capital of another listed company, TCNS Limited followed by the merger of TCNS with itself. The scheme is yet pending for National Company Law Tribunal approval.

The Proposed Transaction:

The proposed Scheme of Arrangement (“Scheme”) inter-alia provides for the separation of MFL business from ABFRL to ABLBL followed by the separate listing of ABLBL pursuant to the demerger.

The demerged division i.e. MFL business is engaged in the business of manufacturing, marketing, sales and/or distribution of fashion apparel, footwear and accessories through offline and/or online channels including wholesale, retail and e-commerce under four lifestyle brands viz Louis Phillippe, Van Heusen, Allen Solly and Peter England along with casual wear brands viz: American Eagle and Forever 21, sportswear brand Reebok and the innerwear business under the Van Heusen brand.

The remaining business of ABFRL will have:

• Value Retail: Pantaloons & Style Up
• Ethnic Portfolio including recently acquired TCNS brands
• Luxury
• Digital Brands

Basically, from the pyramid, ABFRL will separate the middle layer keeping the mass & luxury play with itself.

The “Appointed Date” for the proposed demerger will be April 1, 2024.

Rationale

Some of the rationale as envisaged:

ABFRL runs a diverse portfolio of fashion brands and retail formats with key business segments comprising Madura Fashion and Lifestyle and Pantaloons, Ethnic portfolio along with other new growth platforms. The MFL Business has built a leadership position over a long period of time and has a proven track record of delivering consistent revenue growth, profitability, strong free cash flows and high return on capital.

• The distinctive profile and established business model of the MFL Business makes it suitable to be housed in a separately listed entity, allowing sharper strategic focus in pursuit of its independent value creation trajectory
• The demerger is expected to unlock significant value for the shareholders of ABFRL as each of the listed entities will have their own distinct capital structures, independent growth trajectories and value creation opportunities.
• Result in better and efficient control and management for the segregated businesses, operational rationalization, organization efficiency and optimum utilization of various resources;
• Separately listed companies to attract a specific set of investors for their business profile, and consequently, encourage stronger capital market outcomes

Swap Ratio & Share Capital

The shareholders of ABFRL will get 1 (one) share of ABLBL for every 1 (one) share in ABFRL, in addition to their existing shareholding in ABFRL.

*Further, ABFRL has announced the merger of TCNS with itself. Pursuant to the merger, ABFRL will have 1,07,06,78,979 fully paid-up shares.

**This merger will be effective as on the Appointed date which is being effective date (the date of filing the NCLT order with the Registrar of Companies). As clarified by the management, the TCNS merger will be given effect prior to the proposed merger. Due to the same promotors’ stake in both the demerged company and the resulting company will come down to 49.16%.

11,10,000 non-convertible non-cumulative redeemable preference shares are being held by Birla Management Centre Services Private Limited (entity owned by promoters). As stated in the proposed scheme, upon the effectiveness of the demerger, 5,55,000 (being 50%) preference shares shall automatically be cancelled and in lieu thereof equivalent, non-convertible non-cumulative redeemable preference shares will be issued by the resulting company with the same terms.   

Accounting Treatment

The Demerged Company shall give effect to the demerger of the Demerged Undertaking in accordance with the accounting principles prescribed under the Companies (Indian Accounting Standards) Rules, 2015, as notified under Section 133 of the Act (“Ind AS”), as amended and on the date as determined under Ind AS. The excess of the carrying amount of assets transferred over the carrying amount of liabilities transferred shall be debited to the appropriate reserve within equity.

Resulting Company shall account for the acquisition of the Demerged Undertaking in its books of accounts by applying the principles prescribed in Indian Accounting Standard 103, Business Combinations, Appendix C – Business combinations of entities under common control and other accounting principles prescribed under the Companies (Indian Accounting Standards) Rules, 2015 (Ind AS) as notified under Section 133 of the Companies Act, 2013 and on the date determined in accordance with Ind AS.

Resulting Company, the difference, if any, between the carrying amount of the net assets of the Demerged Undertaking acquired and the aggregate face value of the shares issued to the shareholders of the Demerged Company shall be adjusted to capital reserve.

Financials

Apart from above mentioned segmental assets & liabilities, ABFRL has unallocated assets & liabilities of INR 1587 crore & INR 5657 crore respectively as on 31^st December 2023 which includes investments in various companies including TCNS clothing Ltd of Rs 3121 crore including Aditya Birla garments limited which shall get transferred as part of the demerged undertaking, it seems the balance subsidiaries and joint venture companies will continue to be part of ABFRL. As per the management, the overall ABFRL borrowing, which is estimated to be ~ Rs. 3000 Cr. as of 31st March 2024, will be split between the two companies. The estimated debt to be transferred to ABLBL will be ~Rs. 1000 Cr., and the balance will continue to stay with ABFRL.

Standalone Financials:

There is a significant increase (more than 6 times) in consolidated net assets compared to standalone business for MFL. While for remaining business it reduces significantly. It seems it is due to the assets and liabilities of TCNS Clothing LTD which will be part of ABFRL before the demerger and some of the assets and liabilities of TCNS Clothing also seems to be getting transferred as part of the demerged undertaking, though there is no clarity or comments from the management.

Further, the remaining business turnover on consolidated basis is lower than the standalone basis which indicates inter division sales from the remaining business to the MFL business. As per the scheme, inter-division transactions will continue post demerger at arm’s length price, but each company will have the flexibility to source from other companies.

On standalone basis, MFL net assets have been continuously increasing while that of remaining business is stable since past years.

Within 12 months after the completion of the demerger, ABFRL plans to raise ~ Rs. 2,500 Cr. equity capital to strengthen its balance sheet and fund the growth of the remaining businesses. This looks to fund the amount ABFRL paid to acquired 51% stake in TCNS & to have growth capital.

Basically, the aim for ABFRL management is to have a self-sustained business different from a loss-making business. The management expects scalability in the remaining ABFRL post fund infusion.

Valuation

INR in Crore

No doubt, the product portfolio & margin profile for Trent are different than ABFRL. Foremost importantly, the revenue growth achieved by Trent, mainly on account of Zudio in the last three years, was outstanding. The revenues grew from INR 4498 crore in FY 2022 to INR 12,375 in FY 2024. For the same period, ABFRL revenue grew from INR 8136 crore to INR 13,469 crore.

Conclusion

The proposed transaction marks the undo of the merger done in 2016 where Aditya Birla Group consolidated the entire garment business. The key question that arises is why? Certainly, both businesses have different growth & margin aspects along with sustainability. The management seems to believe it will create value for all the stakeholders.

The remaining business will have a mix of mass category like pantaloon along with luxury & ethnic brands.  The management proposes to raise funds post demerger where in promotor also will participate. This fundraise is effectively funding the acquisition of TCNS holding. It will be interesting to see how the product pyramid helps ABFRL & ABLBL get re-rated.