MUMBAI Aditya Birla Nuvo, part of the Aditya Birla conglomerate, is to pay an initial 8 billion rupees towards getting a controlling stake in the Pantaloons Format clothing brand and retail chain which is being demerged from the broader Pantaloon Retail business, it said on Monday.
The Pantaloons Format spin-off will enable Pantaloon Retail, the country's biggest retail group, to cut its debt by 16 billion rupees from its current 58 billion rupees, which has constrained it from investing in growth.
"It (the retail sector) is a business that needs a good model, which Pantaloon has, and continuous investments, which Birla can offer," said a fund manager at SBI Mutual Fund who declined to be named.
Pantaloon Retail is controlled by tycoon Kishore Biyani's Future Group and will continue to own its other businesses such as hypermarkets under the Big Bazaar brand, the E-zone electronics chain and lifestyle retailer Central.
Retailers including Future Group and Shoppers Stop have been scrambling to raise funds after the Indian government backed down on a decision to allow foreign direct investment in the multi-brand retail sector in December.
"This will help Biyani reduce his mounting debt, which has been a very big concern for his investors," the fund manager said.
Shares in Pantaloon Retail jumped 9.35 percent on Monday to close at 187.70 rupees ahead of the deal's announcement. Before Monday's rise the stock had fallen by more than half since the start of 2011.
Pantaloon Retail will keep a minority stake in the Pantaloons business, which will have its own listing, and will continue to manage it while ABNL will hold at least 50.01 percent on completion of the transaction.
The Aditya Birla group is one of the country's biggest business houses, with interests including mobile carrier Idea Cellular and aluminum maker Hindalco Industries.
Its ABNL arm operates the Madura Fashion & Lifestyle retail business which it said will complement the Pantaloon business.
"The two entities, ABNL's Madura Fashion & Lifestyle and 'PRIL' (Pantaloon Retail) will work closely as partners to derive operational synergies, in terms of back-end, supply chain and many other important value drivers of the business," the company said in a statement.
It said Madura's retail space covers 1.6 million square feet while the Pantaloons Format business is spread over 2.05 million square feet.
"We are delighted to have Mr. Kishore Biyani as our partner in the Pantaloons Format business," ABNL chairman Kumar Mangalam Birla said.
Under the transaction Aditya Birla Nuvo, which the market values at $2 billion, will subscribe to debt issued by Pantaloon Retail which will be converted into equity on completion of the spin-off process, the companies said.
ABNL, which expects the deal to be completed in eight to 10 months, will also make an open offer to shareholders of the newly listed entity, to take its holding to just over 50 percent.
The Pantaloon-branded business is on track to generate 17 billion rupees in revenue in the current fiscal year and expects to add 20 stores annually, the companies said.
Last year ABNL's Madura Fashion & Lifestyle unit generated revenue of 21.45 billion rupees, it said.
(Editing by Greg Mahlich)