Merger to help integrate businesses: CESC

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Kolkata-based CESC is planning to merge Pathik Retail, a holding company of Spencer's Retail, with itself. The rationale behind the move according to Sanjiv Goenka, Vice Chairman of CESC is to integrate businesses under one umbrella to the most possible extent.

Excerpts from CNBC - TV18's exclusive interview with Sanjiv Goenka: 

Q: What is the rationale behind the merger with the holding company and by when will the final details such as the merger ratio and the like be out?

A: The rationale is very simple. The idea is to integrate businesses under one umbrella to the most possible extent. And this is the first step towards that. Power is a stable business with very strong cash flows and a good growth line.

As far as retail goes, the sector is growing at roughly 12-15% every month and as we all know the retail penetration in India is just about 4-5%, which is set to increase, as value creation opportunities in retail are huge.

We at Spencer's have a very aggressive expansion plan  and plan to go up from 132 stores today to 2000 stores in the next three years. We do believe that it makes sense to try and see whether we can have multiple revenue streams in one company rather than just one. So the idea is that CESC has many revenue streams that include power, real estate, as well as retail.

Q: Have you decided by when would the merger ratio be announced? Is that something that you internally work on?

A: The merger ratio has been worked, the valuations of which were done by KPMG. The Board considered the ratio and approved a 2.57:1 ratio.

Q: In favour of?

A: The valuation of CESC is 2.57 times that of the retail company.

Q: How much money would be required for expanding to 2000 stores by 2010? How are you going to fund it?

A: The total investment in this is somewhere between Rs 1000-1200 crore, of which, part will come from internal accruals, while some will come via debt, and the rest will come from capital market proceeds, as Spencer's Retail would go in for an IPO in the next two to four quarters.

Q: What will be the promoter holdings in this merged entity from the CESC promoter point of view?

A: The promoter holding will be slightly above 50%; I think it will be about 54-55% in the merged entity.

Q: How much land does the group currently have and how much do you hope to acquire over the next three years?

A: We are not investing in buying property for retail, but instead, are taking properties in rent; we already have close to about 500 properties, which have been tied up, and more are being tied up everyday.

Q: What is the format of retail? Would it be something like a super market or a hyper city or would it be a combination of a few?

A: We have four retail formats, or which food is one. We will have hyper markets, super markets, convenience stores and daily stores; the smallest format will be on 2000 square feet, while the largest may reach 80,000 square feet. Then we have books, which is another vertical that we have started and have just launched in Gurgaon, a 12,000 square feet store called Books & Beyond. Music is the third vertical that we do with Music World, which already has about 230 odd stores in the country. The fourth vertical is going to be mobile telephone retailing and we have now got 35 operational stores under the name RPG Cellucom.

So these will be the four formats. Going ahead, each one will aggressively expand and each one of it is already going ahead and booking spaces. We are now opening one store every two days, which, in the next three months, will become one store everyday and may be in the next six months will be two stores everyday.

Q: There are some reports going around that you may be looking at a strategic partner for the luxury retail stores. Is there any truth to that and if so by when do you hope to induct one?

A: This kind of speculation has been around for a long time but as of now we have not specifically looked at anything like that; but that is not to say that we shall not look at niche retail partners.

Q: What would be the combined turnover of this entity and how much debt are you taking on your books from Spencer?

A: Spencer has virtually not debts, as it is very low on debt and has been funded largely by equity; we have kept that very clean and neat. So, there will be no additional debt and anyway Spencer's Retail will continue to be a separate legal entity, which will be owned by CESC but a separate company nevertheless.

Q: Of this Rs 1200 crore, how much would CESC be putting in and how much will Spencer be putting in?

A: CESC will not be putting in much. CESC may put in maybe Rs 100-150 crore but bulk of the money will really be coming in from the internal accruals and debt and now the capital issue that we might be planning in the next two-four quarters.

Q: As things stand right now post the merged entity what would the debt equity ratio of the merged entity be?

A: The debt-equity ratio would be slightly better than it is today. CESC stands at a debt-equity ratio of 0.75:1, which will continue to be where it is and the retail arm has virtually no debt and that too will continue as it is. The ownership of the retail company will be held by CESC.

Q: Would this would restricted just to tier-I cities, or would it include the tier-II ones as well?

A: And tier-III also.