Carlyle, Kedaara, Flipkart in running to buy Vishal Mega Mart

16 Feb 2018

The Carlyle Group and a consortium of Kedaara Capital and Partners Group are competing to buy Vishal Mega Mart from current owners TPG and the Shriram Group, according to an Economic Times report citing sources, which adds that online retailer Flipkart may also be in the fray.

Potential buyers, selected after an initial round of screening, are currently conducting due diligence. A deal could help the turnaround of a high-profile casualty in the retail sector. TPG had mandated Kotak Mahindra Bank last year to find a buyer for its seven-year-old investment.

Vishal Mega Mart claims to be India's largest fashion-led hypermarket chain with 204 stores occupying 3 million square feet in 110 locations across India. It posted sales of Rs3,000 crore in FY16. The sellers expect a valuation of about Rs 5,000 crore, valuing India's sixth-largest wholesale and value retailer at 20-25 times FY19 (EBITDA), according to ET's sources.

Carlyle and TPG declined to comment, while Kedaara, Partners and Flipkart did not respond to queries.

TPG teamed up with the Chennai-based Shriram Group to buy the distressed company after it piled up loans, forcing founder Ram Chandra Agarwal to sell at the behest of lenders State Bank of India, HSBC, HDFC and ING Vyasa among others.

As Indian laws don't allow foreign entities in multi-brand retail, the company was split into two. TPG Wholesale Pvt was the wholesale and franchise arm that also oversaw backend sourcing, franchises, merchandising and logistics. Airplaza Retail was the front end retail arm.

TPG Wholesale, later renamed Vishal Mega Mart Pvt Ltd, was owned by the private equity investor while Airplaza was owned by Shriram Distribution Services Pvt Ltd. The former acts as a franchiser to Airplaza and other independent franchisees who run Vishal Mega Mart stores.

''The FDI (foreign direct investment) rules remain the biggest stumbling block even now. The foreign funds will have to look for a local partner or a fund like Kedaara, which is registered as an Alternative Investment Fund (AIF). Ideally this should have been picked up by a local strategic investor but the valuation ask is very high,'' an executive directly involved in the discussions told ET.

At a compounded annual growth rate (CAGR) of 17 per cent between 2012 and 2017, Airplaza lags behind bigger rivals such as Reliance Retail or Aditya Birla but the bigger wholesale arm has done better than direct competitors like Metro Cash and Carry or Walmart.

Vishal Mega Mart is ''positioned uniquely in the retail segment driven by its favourable product mix and target segment,'' according to a Crisil report on the company. ''High proportion of apparel and general merchandise provides healthy profitability, while the food and grocery segment attracts footfalls, thereby ensuring that the company's exposure to competitive intensity is relatively lower as compared to other players in the retail segment.''

PE firms have thus far focussed on single-brand retailers. Kedaara invested in Kolkata-based Manyavar while TA Associates backed fashion brand W last year. Similarly, Lighthouse invested Rs76 crore in V2 Retail to help speed up the company's store expansion plans. Kedaara recently raised a second fund of $750 million.