Aditya Birla Fashion, TCNS Clothing’s shares tank on merger news; analysts say merger was not necessary

• At around ₹1,650 crore for 51% stake, the acquisition could be one of the largest deals in the Indian fashion space.
• Post the merger, every shareholder of TCNS will receive 11 shares of Aditya Birla Fashion for every 6 shares that they hold in TCNS.
• Analysts are not very positive on the merger given the fact that TCNS has been making losses for the past two financial years and has been underperforming its peers.
• With this acquisition, analysts expect Aditya Birla Fashion’s net debt to rise to the highest level in three years. In fact, the company may also have to raise money to finance the acquisition.
  

After Aditya Birla Fashion and Retail (ABFRL) announced a merger with TCNS Clothing over the weekend, shares of both the companies fell sharply on Monday – while TCNS tanked 20%, Aditya Birla Fashion fell 5%.

As part of the transaction, ABFRL will make a conditional open offer to acquire up to 29% of TCNS at ₹503 per share from public shareholders and acquire the remaining stake from the founder promoters to reach an overall shareholding of 51% in TCNS.

Post the merger, every shareholder of TCNS will receive 11 shares of ABFRL for every 6 shares held in TCNS.

The acquisition could be one of the largest deals in the Indian fashion space as the value of the promoter stake and open offer consideration for TCNS is around ₹1,650 crore for 51% stake.

Kumar Mangalam Birla, chairman at Aditya Birla Group, said the acquisition of TCNS prepares ABFRL for the next phase of growth.

“By embracing TCNS's portfolio of loved women’s ethnic brands, we are reinforcing our commitment to ethnic wear, the largest category in the apparel industry. With this acquisition, the fast-growing ABFRL platform is poised for the next phase of transformational growth.”

Analysts feel merger unnecessary given TCNS Clothing’s underperformance
Analysts, however, are not very positive on the merger given the fact that TCNS has been making losses for the past two financial years – despite a narrowing of losses, it is still underperforming its peers.

“We are not sure why ABFRL deemed it necessary to acquire TCNS’ business, other than the fact that it immediately pushes up its revenue size by 8-10%. What ABFRL is buying is essentially ₹12-13 billion of annual revenue, given that it may need to almost entirely reconstruct the profit and loss (P&L) from scratch from a profitability point of view,” said a report by JM Financial.

Aditya Birla Fashion & Retail will raise ₹700-800 crore in debt to help fund the acquisition of TCNS, according to an ET report.

“Unlike other mergers and acquisitions, we believe, this transaction does not need to be looked at from an earnings per share (EPS) accretion/dilution perspective or synergies. Key aspect is the fit of the brand and more importantly turnaround, given that TCNS had been lagging peers in recovery and underperforming for more than two years now. Only a successful turnaround of the same can create shareholder value,” said analysts at Nuvama Institutional Equities.

TCNS is among key players in the women's ethnic wear market with brands such as W, Aurelia, Wishful and Elleven.

However, analysts believe that the market remains highly crowded with a large section of unorganised players catering to highly price-conscious women consumers.

“This possibly has led to a weak 2% revenue compound annual growth rate (FY19-23E) in TCNS operating at a premium pricing and >65% gross margins. Therefore, we believe that TCNS’s earnings revival would be challenging and that building scale internally could have been a good alternative for ABFRL,” said a report by Motilal Oswal.

ABFRL’s net debt may rise to highest in three years
In the last couple of years, ABFRL has acquired brands like House of Masaba, Sabyasachi, Jaypore, Finesse International (Shantanu & Nikhil) and several others.

With the latest acquisition, analysts expect ABFRL’s net debt to rise to its highest level in the last three years. In fact, the company may also have to raise money to finance the acquisition.

“We estimate ABFRL’s March 2023 net debt to be much higher than our initial forecasts – perhaps at its highest level in the past three years. Over and above, the company would now need to take on additional debt to finance the cash leg of the transaction, viz purchase of 51% stake for c.₹16.5 billion,” said a report by JM Financial.

Some analysts say that the list of acquisitions by Aditya Birla Fashion is just burdening its portfolio with loss-making companies.

“In the last few years, ABFRL has invested in multiple new businesses, with a long tail of businesses that are presently loss-making or yet to stabilise…TCNS’s acquisition may add to that long tail,” said a report by Motilal Oswal.

On Monday, shares of ABFRL closed 3.38% lower at ₹206.95 while those of TCNS Clothing ended 19.99% lower at ₹416.75


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