The Aditya Birla Group plans to create the country’s largest branded apparel company by merging apparel-making Madura Fashion and Lifestyle division from Aditya Birla Nuvo (ABNL) with loss-making Pantaloon Fashion and Retail. Pantaloon, which will be renamed Aditya Birla Fashion & Retail, will have a combined turnover of around Rs 5,290 crore with an operating profit or EBIDTA of Rs 493 crore.

Madura, houses brands such as Van Heusen, Louis Philippe and Allen Solly, had sales of Rs3,226 crore, while department chain arm Pantaloon reported a revenue of Rs 1,661 crore in the year ended March 2014. However, unlike Madura, which drove a significant chunk of the profit for its parent ABNL, Pantaloon has been in the red with a net loss of Rs 187 crore last fiscal. ABNL owns 73% of Pantaloon.

According to the deal, ABNL shareholders will get 26 shares of Pantaloon for every five held. Madura Fashion shareholders will get seven shares of Pantaloon for every 500 held. In addition, preference shareholders of Madura will get one share of Pantaloon. Simply put, an existing investor with 100 equity shares in ABNL will continue to hold those and will also get 520 of Pantaloon.

Standard Chartered Bank was the transaction advisor, while JM Financial Institutional Securities provided the fairness opinion for Pantaloon and Axis Capital to ABNL. Price Waterhouse & Co and Bansi S Mehta & Co were the independent valuers.

For Birla, it will now be a core retail play, which will have its own benefits in synergies over a period of time,' said Abneesh Roy, associate director at Edelweiss Securities. But the company will still face inherent issues such as online threat, increasing cost and slow consumer demand.

According to Vishal Kampani, MD and CEO, institutional securities group, at JM Financial, the size along with the expansion and synergies would make this an extremely attractive investment opportunity for domestic and foreign investors. However, the merged entity will have a relatively bigger retail footprint of 5 million square feet spread across 1,900 stores, nearly double that of Shoppers Stop in size. The deal will help build synergy and strengthen regional market share, the company said. While Madura is strong in both north and south India, Pantaloon has aleadership position in the east.

Birlas bought Pantaloon from Kishore Biyani's Future Group and has increased its store count from 65 stores three years ago to 100 now. While it was widely speculated that Birla would bring its loss-making supermarket format more under the new entity, the company said it had no such plans. The deal will take six to nine months to complete.