Birlas stare at ~70-bn loss on sale of More
The promoters of Aditya Birla Retail (ABRL), an unlisted firm operating the More brand of grocery stores, are likely to lose close to $1 billion with the proposed sale of ABRL to Samara Capital, a private equity (PE) firm.
This is because the suitor is offering to take over only the external debt of ABRL worth ~40 billion, said a banker close to the development.
The Birlas, in their personal capacity, have invested close to ~110 billion in debt and equity of ABRL over the past decade and thus, would lose around ~70 billion with the transaction, including the entire equity invested in the grocery operator. ABRL also has to write off ~10 billion of debt from various unlisted group companies.
The accumulated losses of ABRL crossed ~67 billion in 2016-17 and are expected to rise further in the recently concluded year ended March 31. The company’s financial details for 2017-18 are not available.
“The firm had huge overheads and failed to achieve the scale required for food and grocery business. That is why we did not pursue the takeover of ABRL,” said the CEO of a rival company who was approached for a takeover.
The Aditya Birla group had earlier wanted to merge ABRL with its listed fashion retailing business – Aditya Birla Fashion and Retail, but the institutional and PE investors of the fashion business were not in favour of the merger and hence, the plan was dropped. For 2016-17, ABRL had reported a loss of ~6.44 billion on sales of about ~42 billion.
Since past losses of ABRL were funded largely through external borrowings, analysts said the company’s debt and interest burden also shot up, resulting in continued net losses. “Unless more equity funding is made into the company, its debt burden will remain an albatross around the neck,” said an industry analyst. The total debt of ABRL increased to ~64.56 billion for the fiscal year ended March 2017.
In the past decade, among the top corporates which entered the grocery business, few such as Reliance Retail and Future Retail have broken even, while Tata’s Star Bazaar and Sanjiv Goenka-owned Spencer’s are yet to make cash profits. This was mainly due to wafer-thin margins, high overheads, and competition from e-commerce companies. The only notable exception in the retail sector is Avenue Supermarkets, which has a different business model. Avenue, the operator of D-Mart brand of stores, pays vendors upfront and passes on the discounts to customers. It has achieved scale, which is critical to the business and also owns its properties and hence, saves on rentals.
An email sent to the Aditya Birla group did not elicit any response.
For the fiscal year ended March 2018, experts said ABRL has achieved store-level break-even, resulting in 95 per cent of its supermarkets and 90 per cent of its hypermarkets becoming profitable. The break-even is due to its continued focus on store rationalisation through closure of unviable stores, fine-tuning its store format strategy, and tight control on the operating cost structure. If the trend continues, ABRL is expected to post a profit at the Ebitda (earnings before interest, tax, depreciation and amortisation) level in the current fiscal year ending March 2019.
Of the total investment by Aditya Birla group, about ~32 billion is through a combination of equity and optionally convertible bonds. Of this, bonds worth ~28.7 billion are due for redemption in 2018-19, and the group is expected to either extend the bonds or convert into equity.
Spurred by the success of Walmart in the US, ABRL was set up by the promoters of Aditya Birla group in 2007 to enter the grocery business. While its rivals, including Avenue Supermarkets, Future Retail, and Reliance Retail, managed to grow and turn profitable, ABRL, which has around 509 stores and 20 hypermarkets, continued to make losses. Last year, the group also shut down its fashion retailing business – Aditya Birla Online Fashion - after its online business failed to take on competition from the likes of Flipkart and Amazon.