Aditya Birla Fashion and TCNS Clothing shares fell sharply on Monday after Aditya Birla Fashion and Retail announced a merger over the weekend. TCNS fell by 20%, Aditya Birla Fashion by 5%.
The transaction involves ABFRL making a conditional open offer to buy up to 29% of TCNS from public shareholders and to acquire the remaining stake from the founder promoters to build an overall stake of 51% in TCNS.
TCNS Shareholding in Aditya Birla Fashion
TCNS shareholders will receive 11 shares of ABFRL for every 6 shares they hold in TCNS following the merger.
TCNS is one of the largest acquisitions in the Indian fashion industry, with the promoter stake and open offer consideration totaling about 1,650 crores.
Aditya Birla Group chairman Kumar Mangalam Birla said the acquisition of TCNS prepares the company for growth in the future.
We are strengthening our commitment to ethnic wear, the largest category in the apparel industry, by integrating TCNS’s portfolio of loved women’s ethnic brands. With this acquisition, ABFRL is poised for the next phase of growth.”
In light of TCNS Clothing’s underperformance, analysts believe a merger is unnecessary
In spite of TCNS’ narrowing losses, analysts are not very optimistic about the merger, given that it has suffered losses for the past two years.
Apart from the fact that it immediately boosts the company’s revenue size by 8-10%, we are not sure why ABFRL decided to purchase TCNS’ business. According to a report by JM Financial, ABFRL is purchasing essentially $12-13 billion in annual revenue, which may require it to almost entirely reconstruct profit and loss (P&L) from scratch.
ET reports that Aditya Birla Fashion & Retail will raise 700-800 crore in debt for its acquisition of TCNS
It is our belief that this merger and acquisition does not require an assessment of earnings per share (EPS) growth or dilution, or synergies, as do most mergers and acquisitions. Given that TCNS has been lagging peers in recovery and underperforming for more than two years now, the key aspect is the fit of the brand and turnaround. Shareholder value can only be created by a successful turnaround of the same, according to Nuvama Institutional Equities analysts.
With brands such as W, Aurelia, Wishful, and Elleven, TCNS is a key player in the women’s ethnic wear market.
The market remains highly crowded, however, with many unorganised players catering to women who are highly price-conscious.
As a result, TCNS operating at premium pricing and >65% gross margins may have experienced a weak 2% revenue compound annual growth rate (FY19-23E). According to Motilal Oswal, TCNS’s earnings revival is challenging, so building scale internally could have been an effective alternative for ABFRL,” said the report.
ABFRL’s net debt may reach its highest level in three years
Over the last couple of years, ABFRL has acquired brands such as House of Masaba, Sabyasachi, Jaypore, Finesse International (Shantanu & Nikhil), and others.
As a result of the latest acquisition, analysts expect ABFRL’s net debt to reach its highest level in three years, and the company may have to raise money to complete the deal.
ABFRL’s net debt is likely to reach its highest level in the past three years in March 2023 – much higher than our initial forecasts. Additionally, JM Financial reports that the company would need to take on additional debt to finance the cash portion of the deal, namely buying a 51% stake for $16.5 billion.
Analysts say Aditya Birla Fashion’s acquisitions are simply burdening its portfolio with loss-making companies
The acquisition of TCNS may add to the long tail of businesses that are presently loss-making or yet to stabilize that ABFRL has invested in over the past few years, according to a report by Motilal Oswal.
At 206.95, ABFRL closed 3.38% lower, while TCNS Clothing ended 19.99% lower.