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Acquisition to make deeper inroads into women ethnic wear

ABFRL announced the acquisition of TCNS clothing in a two-step deal for a total value of INR29b, i.e., 10% below its current market cap of INR32.2b with INR16.5b of cash payout for 51% stake and 5.4% dilution for the remaining 49% stake. With a relatively low net debt of INR25m, the company's valuation in terms of EV/Sales and EV/EBITDA for FY23E at 2.3x/66.5x. Assuming a recovery to 8% EBITDA margin (Pre IND-AS 116) in FY25E, a middle ground from the current 3.5% and 16% in FY20, TCNS would be valued at 22.6x EV/EBITDA similar to ABFRL’s FY25E EV/EBITDA (pre IND-AS 116) of 22x at the current price. Deal Contours The deal is structured in two steps, wherein, in the first step, it will acqui

Deal Contours

The deal is structured in two steps, wherein, in the first step, it will acquire a total of 51% stake for cash at a price of INR503 per share, for INR16.5b. This will be partly from Promoter (between 22 and 30% stake) and open offer to minority shareholders (20-29% stake) depending on open offer demand. Post the cash deal, TCNS clothing will be merged with ABFRL, offering 11:6 share swap ratio (11 shares for every 6 share held) for the remaining 49% stake, implying 5.4% dilution. The current share swap offer, which is priced at 22% discount to the INR503 cash offer for a 51% stake, indicates that the share swap parity for ABFRL is at its CMP of INR280. Of the total shareholding, promoters can sell off a minimum 22% out of the 32% stake, i.e., ~68% of its holding, while the rest of the minority shareholders can sell 29% (in open offer) out of 68%, i.e., 44% of its holding.

Earnings dilution and Leverage Financial Impact

Assuming TCNS’s recovery to 8% EBITDA margin (pre IND-AS 116) and 3% PAT margin in FY25E, it may generate revenue/PAT of INR16b/INR480m, i.e., 9%/12% of ABFRL. After adjusting for the financial cost of an 8% interest on INR16.5b cash outlay and 5.4% equity dilution, TCNS could register an incremental net loss and EPS of INR INR513m and INR0.7/share for FY25E. This would represent a decline of 18% for ABFRL, implying INR3.2/share. The cash composition of the deal could be funded by GIC’s warrant issue of INR14.5b (6.2% dilution) due in FY24. After a large fund raise of INR22.5b, it reduced its leverage from the peak of INR21b in FY20. Since then, it has done a series of acquisitions in Ethnic Wear in FY21 (see exhibit 2), along with smaller acquisitions (Reebok India, House of Masaba, and D2C) in the last couple of years, reaching INR3.4b net debt in 3QFY23. The TCNS acquisition will push it back to net debt of INR5b (excluding lease liability) against 200 a net cash of INR11b in Dec’23 (adjusting GIC warrant issue of INR14.5b).

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