Kerala-based Varkeys Retail Ventures has hit the private equity fundraising trail which may see it diluting a significant minority stake, said sources. The retail chain, with 59 stores across the state, could be divesting at least 25% stake to raise funds to manage growth as well as for stabilising operations, which has been overheated by rapid expansion.  The retailer has appointed investment bankers for a possible stake sale.

When contacted, Varkeys managing director Toby Alapatt confirmed that his firm is looking to raise funding. Alapatt said that he is willing to dilute up to a 25% stake in the firm to private equity investors. But sources that the stake dilution by Varkeys could go up as the company may be using the funds to pay back the creditors, among others. Sources also said that company may be open to dilute up to a 49% stake in phases after the initial stake sale.

Varkeys has spent significant capital, including debt, for this expansion, and it would like to de-leverage before pursuing further growth. Varkeys had expanded across various cities in Kerala at a rapid speed in  recent times. The retail firm has followed a cluster strategy in the top cities in the state like Kochi, Trichur, Ernakulam and Trivandrum.  A new round of equity infusion into Varkeys might be used to stabilise operations before further growth. 

One banking source said the company has faced liquidity pressure in recent months, which could be a possible trigger for the fund raising now. “We would use the funds for our expansion plans. Naturally, some funds would be used to meet debt,” said Alapatt. He declined to disclose the expansion plans of Varkeys, which has a turnover of around Rs 170 crore to Rs 180 crore.

This would be the second time Varkeys is planning a private equity fundraise. In 2007, the retailer had approached PE funds and also was in to raise  around a Rs 60 crore investment from IDFC Private Equity. The plan then was to dilute around a 20-25% stake, but Varkeys had backed out postponing its stake dilution plans, possibly to shed stake after growing bigger.

The company could be looking at raising a similar amount or more as it kicks off a fresh funding process, sources added.

Varkeys operates in formats like discount hypermarket – “V Mart” and Varkeys Bakery and Supermarket. Besides goods from FMCG majors, it also sells products under the private label brand called Alpro.

While early investments in retail chains have reaped good results (like ICICI Venture’s investment in Pantaloon), some deals in recent times have soured. This comes on the backdrop of economic slowdown in 2008 and  2009, and rapid expansion creating liquidity issues for retailers. In this context, it remains to be seen if private equity is ready to get back on the retail bandwagon.

Subhiksha, backed by ICICI Venture and PremjiInvest, created a national presence at a breakneck speed but went bankrupt in 2009. Another retailer, Vishal Retail, is currently undergoing a corporate debt restructuring (CDR). The firm has been approached with a buyout proposal by global private equity major TPG Capital, which has been given a nod by Vishal’s CDR cell.

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