Introduction

ODEL
ODEL was nurtured from a simple and humble beginning of retail operations from a car boot
about 25 years back by a determined female entrepreneur Ms. Otara Gunawardane. Within no
time, ODEL became a household name as a popular retail outlet in Sri Lanka.
ODEL commenced their outlet chain in larger shopping malls such as Majestic City, Liberty
Plaza etc. and moved to the current Colombo 07 premises in 1996 to attract more customers. As
a result, popularity grew in exponential terms and it became a must visit destination for
clothing, especially targeting the upper segment. Having observed the success and the growing
demand for retail shopping, a few other competitors such as House of Fashion, Romafour etc.
also started to provide similar retail shopping opportunities for the Sri Lankans. However, ODEL
maintained the distinctive competences in quality, segmentation, pricing strategies, etc. in
comparison to other competitors.
Due to the growing demand and popularity not only among the Sri Lankans, but also among the
high class Diplomats and the Tourists, ODEL further expanded from 10,000 sq. ft. to 40,000 sq.
ft. at the same location proving ample opportunities for the shoppers to enjoy a variety of
products and related services through augmentation. To align with this, a new brand identity was
unveiled; ODEL: Mind, Body & Soul. Delight, ODELs very own sweets boutique, offering
confectionary, collectors recipes and coffee table books, ornaments and t-shirts apart from the
famous Delight chocolates, sweets, cupcakes, nuts, dried fruits, tea and spices was also launched.
In 2007, ODEL added Embark as a CSR project to take care of animals, and also made
arrangements to expand their branch network to Moratuwa, Panadura, Mt. Lavinia, and at the
Katunayake International Airport.
ODEL created history in 2010 in the records of the Colombo Stock Exchange (CSE) with its
Initial Public Offering (IPO) confirmed to be oversubscribed by 63.8 times within 24 hours after
opening, beating the previous record which was 20 times. It was the first fashion retailer to go
1

public, and Otara Gunewardene became the first female entrepreneur to take a company public in
Sri Lanka. This amply signifies the ODELs popularity, demand and the potential to earn. By this
time, ODEL has already introduced, Brands such as Backstage, LUV, as well as Aryuvedic
products, globally recognized Cosmetic Brands, and handloom products.
ODEL announced a significant change of ownership, when Parkson Retail Asia Limited
purchased a 41.82 per cent stake in the company for Rs 1.424 billion. Following the acquisition,
Founder of ODEL, Otara Gunewardene retained a 27.88 per cent stake in ODEL PLC and
continues as the CEO of ODEL, along with her siblings who also own a considerable stake in the
company. Otara stated this as a new chapter in the evolution of the company, strengthening her
role in an infusion of foreign direct investment to Sri Lanka, whilst raising capital for the
companys growth.
In 2014, Ms. Otara Gunawardane the Entrepreneur and the architect of ODEL sold the ownership
of the remaining percentage to another well-established conglomerate, Softlogic Holdings PLC.
in Sri Lanka. Thereafter the Malaysian based Parkson Retail Asia Ltd also sold their stake to
Softlogic Group in a mandatory offer.

Softlogic Group of Companies

Softlogic Holdings PLC., rated as one of Sri Lankas most dynamic, emerging and aggressive
conglomerates, commenced its business operations as a software developer with just 12
employees in 1991. It has now expanded its footprint holding leading positions in domestic
growth oriented sectors such as ICT, Mobile Accessories, Healthcare, Retail, Financial Services,
Fast Food (such as Burger King) Automobiles and Leisure. The Group now has over 6500
employees, generating a turnover of more than USD 220 Million (www.cse.lk). The Groups
representations and strategic alliances with reputed global institutions and large multinational
corporations confirm its unparalleled local stature. Covey (2007) stated that diversification has
its own limitations, however although Softlogic is a much diversified group, their business
operations and activities have been sound so far.
2

Softlogic Group is also famous for representing as agents for reputed global Brands such as
Samsung, DELL, Nike, Levis etc. The Softlogic Group is led by Mr Ashok Pathirage who is
viewed as an emerging business tycoon in Sri Lanka, and is rapidly expanding the business
domain and horizons through diversification. As per Otara (2014), the acquisition of 44.5% of
Odel by Softlogic Group for Rs 2.6 Bn, will take Odel to the next level of retail shopping in
Sri Lanka.
In the recent past, Softlogic Group has been selling their global Brands in Sri Lanka at various
outlets due to non availability of a particular location to house all these Brands. Acquisition of
Odel will now pave the way to bring not only the retail, but also all these Brands under one roof
taking the Sri Lankan retail shopping to greater heights.

Strategic Relevance of ODEL to Softlogic

Horizontal Integration (HI) is one of the most popular and effective expansion strategies in the
corporate world. HI encapsulates Mergers, Acquisitions, Buyouts and Hostile takeovers. Through
acquisitions:
1) Companies can expand their horizons,
2) Synergize their trading efforts,
3) Reduce the competition
4) Evolve in to new markets etc.
Forward Integration
Forward integration comes under the Vertical Integration strategy. This is to strengthen the
distribution channel to reach the consumer easily and more effectively. Since Softlogic has
obtained several reputed Brands such as Nike, Samsung, Levis, Dell, etc. they need a sound
retail outlet chain to distribute them and easily reach the consumer. Acquisition of Odel
undoubtedly paved the way for this strategically. This can be termed as one real life scenario
where Horizontal and Forward integration took place in Sri Lanka.
3

The perceived notion in the foreseen future is that Softlogic Group will expand the Odel chain to
the next level of retail business in the caliber of retail chains such as M&S (UK), providing the
opportunity for the Sri Lankan consumers not only to purchase clothing and accessories, but also
Electronics, Mobile Phones and accessories, ICT related products, etc under one roof.
In addition, Pathirage (2014) stated that the tourist shopping has added to the growth story.
ODEL now occupies nearly 40% of the recently opened luxury shopping complex, Arcade at
Independence Square, and have housed brands such as Nike, Levis, Giordano, and Charles &
Keith, VIP, Carlton and Samsonite, and the recently launched Tommy Hilfiger. Needless to say,
that all these leading apparel brands across the world will be sold at the acquired ODEL soon by
the Softlogic Group.

Financial Impact
Impact of Odel Acquisition on Financial Statements of Softlogic
The acquisition of Odel was funded through debt finance, obtained from Hatton National Bank
PLC (HNB). Therefore the main focus of this analysis should be the impact on the gearing and
debt levels of Softlogic immediately after the acquisition.
The Interim Reports of Softlogic for the quarters ended June and September 2014
(www.softlogic.lk) were analysed to identify the impact of the Odel acquisition on the company.
As the takeover took place on the 11th of September 2014, these statements reflect Softlogic
Companys position immediately before and after the acquisition. Softlogic had several
acquisitions and divestments in various segments throughout the year, therefore this analysis was
limited to the Retail Segment (where possible) which Odel belongs to, to more accurately
evaluate the impact of this acquisition on the financial statements.
Profitability, Liquidity, Investment and Gearing Ratios were calculated and analysed as follows.
Refer Annexures for supporting calculations.
4

3 months to
3

months 30th

to
Category

Ratio

change

6.5%

-5.1%

78.5%

16.8%

-61.7%

7.5%

8.2%

0.7%

Margin

PAT/Revenue*100
4.1%
Current assets/Current

2.6%

-1.5%

Current Ratio

Liabilities
Current Assets

1.19

1.57

32%

0.67

0.92

37%

Profitability Growth

June 2014
in

Revenue/previous
period Revenue*100
11.6%
Change in Operating

Operating

Profit/previous period

Profit growth

Operating Profit *100

Operating

Operating

Profit

Profit margin
/Revenue*100
Net
Profit

Liquidity

2014

Revenue

Formula
Change

30th September

less

Inventories/Current
Quick Ratio

Liabilities
Operating

Profit

/Capital
Efficiency

Gearing

Investor

ROCE

Employed*100
4.5%
Operating Profit/Total

2.9%

-1.6%

ROA
Debt/Equity

Assets
Non-Current

1.67%

1.69%

0.02%

(Group)

Liabilities/equity
Operating

45.8%

68.2%

22.4%

Interest Cover

Profit/Finance Costs
1.23 times
Profit
After

1.32 times

7%

EPS (Group)
PER (Group)

Tax/Number of Shares
Share Price/EPS

Rs. 0.13
122 times

160%
-56%

Rs. 0.05
276 times

(Source; audited and interim accounts of Softlogic 2014)

5

The revenue growth for the three months ended 30 th June (1st April to 30th June) was 11.6% while
the revenue growth for the three months ended 30 th September (1st July to 30th September) was
only 6.5%. The revenue grew at a greater pace for the first quarter of 2014 compared to the
second quarter during which the acquisition took place. In line with this trend the operating profit
growth too was higher in the three months ended 30 th June (78.5% growth) compared to the
second quarter of 2014 (16.8% growth). Although the operating profit margin has risen over the
two quarters by a marginal 0.7%, the net profit margin too has fallen by 1.5%, which in turn
could have been caused by the increase in finance costs.
The Segments current ratio has improved over the two quarters, showing an increase of 32%,
along with the quick ratio which rose by 37%. Closer analysis of the financial statements for the
two quarters show that this improvement in the liquidity ratios is due to the fall in inventories
and a greater fall in current liabilities compared to the fall in current assets.
The Return on Capital Employed (ROCE) for the Retail Segment fell over the two quarters by
1.6%, possibly due to the drop in operating profit, and increase in non-current liabilities of the
segment, as the acquisition of Odel was mainly financed using Debt capital. The Return on
Assets has remained the almost the same over the two quarters with a negligible change of
0.02%, as the increase in operating profit and total assets was almost equal.
The gearing ratio of the Company as a whole has risen by over 22%, that is, from 45.8% to
68.2% from June to September14. This is mainly due to the investment made in acquiring Odel,
which, as mentioned previously was wholly financed by borrowings. This rise in debt resulted in
a 9.2% increase in Finance costs of the Segment. However, the increase in finance costs of the
segment has not affected the interest cover, which improved by 7% over the two quarters, as the
increase in operating profit was greater than the increase in finance cost.
The investor ratios Earnings Per Share (EPS) and Price Earnings Ratio (PER) were calculated for
the group as a whole due to the lack of segmental information. The EPS showed a significant
increase over the two quarters, however the share price rose by a lower margin therefore the PER
shows a drop of 56%.

Overall, it seems that the Retail segment of Softlogic has performed poorly in terms of
profitability, and performed well in terms of liquidity. The Gearing ratio of the company is a
cause for concern.
However, the financial statements analysed here were for the quarters ending 30 th June and 30th
September, which is immediately after the acquisition. Therefore the full financial benefits and
possible synergistic effects of this takeover will not be reflected in the statements for the quarter
ended 30th September. Therefore it is likely that the performance of the Segment as well as of the
group will improve significantly, and this may be reflected in future financial statements.
It must be highlighted that although the Retail Segment of Softlogic was taken for the analysis of
the impact of the acquisition of Odel, this Retail Segment includes other subsidiaries, which
would also have an effect on these ratios. Therefore, for a more comprehensive analysis the
effect of other subsidiaries in this segment has to be eliminated. In addition to this, to analyse the
success of this acquisition, it has to be compared with a similar acquisition of the same
magnitude in the same industry. Further, details of Cash flows before and after the acquisition,
industry norms and average ratios etc. should also be analysed.

Challenges Faced by Softlogic

1. Overestimation of Synergistic benefits and price These two are very common
mistakes made by the acquiring company during a takeover. Softlogic would have
obtained expert views and advice from several sources (especially from the external
auditors) with regards to assessing the price to purchase ODEL, however if they
overestimated the future benefits gained through the acquisition, Softlogic may have in
turn overpaid for ODEL, which will affect the performance if the combined company.
Softlogic would have discussed, and meticulously planned at the apex level how to
synergize the trading efforts to maximize the wealth from the proposed deal. In this
aspect, some of the key Results Areas (KRAs) would have been the immediate gains,
share value, profitability, economic sustainability etc.
7

2. Integration According to Carder (2014), the main challenge for Softlogic will be
to integrate its existing Retail businesses, while maintaining the Spirit of ODEL. This is
true to a great extent as DePhampillis (2010) also stated that a slow pace of integration is
one of the common challenges in acquisitions. Mendis (2014) also stated that usually in
acquisitions the acquirer will dominate and the acquired will be eliminated.

3. Mode of Financing Another key challenge would have been the Mode of Financing.
Gearing ratio as per above has increased to 68% which means a reasonable portion of
profits have to be set aside to repay debt, and to repay this amount of debt, the acquisition
and synergy benefits should generate adequate profits. Also, finding the lowest rates to
finance would have been a challenge despite the fact that the market was liquid at the
time of the deal. Needless to say, that with this acquisition, the Softlogic groups debt
capacity will be curtailed to a great extent. Banks will also hesitate to lend further
considering the gearing ratio. Hence this would have been another challenge for the
group.

4. Cultural aspects ODEL, owned by Otara had a unique organizational culture and
Softlogic has another culture under the leadership of Ashok. Historically, mergers and
acquisitions are envisaged to be viable in financial and trading terms, yet yield poor
results in aligning two distinct cultures. This invisible culture plays a pivotal role in the
success of mergers and acquisitions. Hence Softlogic would have thought about this
aspect seriously, along with other related issues such as change management, transition
period, retention of staff, etc.

(Source; www.google.lk)
This

indicates how Softlogic can

pay

attention to each category

of their

stakeholders to keep them

satisfied. D denotes the

most

important

and

crucial

stakeholders as their power

and the

interest over the company is

very

high. To the contrary, A

category does not need

much

attention as their degree of

interest

and

power

are

comparatively low.

5. Regulatory Requirements Both ODEL and Softlogic are listed companies at the
Colombo Stock Exchange. Hence for a deal of this nature obtaining prior approval from
the Stock Exchange and other regulatory bodies such as Inland Revenue, Securities and
Exchange Commission is mandatory. Both companies would have agreed to a NonDisclosure Agreement (NDA) for the deal to maintain secrecy until the final statement is
issued as Otara stated.

Post-Acquisition Strategies
1. Maintaining Growth This is one of the key strategies that Softlogic has to put in place
to satisfy its shareholders. ODEL has been synonymous with quality, class, innovation
and growth. Hence upon acquisition, all stakeholders expect Softlogic to have proper
9

strategies in place to make sure that ODEL continues its upward trend. In this regard,
Softlogic can focus on the Mendelow Matrix as depicted below to identify the important
stakeholders in order to formulate post acquisition strategies. Another dimension to this
is, considering the quantum of debt obtained for the acquisition, Softlogic is compelled to
generate adequate funds to repay debt. Hence sound strategies for financial stability and
growth are must.

2. Avoiding Diseconomies of Scale When a company is expands, there is a higher

probability of facing Diseconomies of Scale, due to problems in coordination and control
over a large scale operations. Hence strategies have to be formulated to avoid this
situation and to continue the growth. Here, Softlogic has to focus on Operations
Management, Economics and Financial Management simultaneously, and formulate
strategies in order to maximize the economies of scale without allowing the company to
reach diseconomies of scale. This is where professionalism, and expert advice are
required for business tycoons.
3. Human Resources Management Companies formulate strategies; but people do
execute them. Hence people management is very important especially upon acquisition.
Softlogic has to focus on enhancing synergy, between two companies and blend them
together in order to get the work done, satisfy the customers, allow the staff to get
involved in integration process and then finally to achieve the objectives of maximizing
the wealth for shareholders. Softlogic has to convince the staff at ODEL that they will be
well looked after and they are the strategic assets of the company. Under any
circumstances, a Voluntary Retirement Scheme (VRS) should not be offered for ODEL
staff though it may be financially viable. The rationale for this is;
a) In Sri Lanka, labour regulations are in favour of the employee. Therefore the company
may face major issues if Softlogic attempt to make staff redundant.
b) A company-wide VRS package may allow the more effective employees to leave the
company with a handsome package, where as the low performers will remain with
ODEL.
10

c) If the efficient staff leaves, Softlogic will be initially inundated with operational, HR, and
strategic issues upon acquisition.

4. Guiding ODEL to the Next Stage As per newspaper articles and other business
reports, Softlogic acquired ODEL to take it to the next level of retail shopping in Sri
Lanka. This objective must be achieved, otherwise the acquisition investment will not be
worthwhile. This upgrading process has to be carried out carefully, also considering how
other globally reputed companies have performed such integrations successfully. In this
aspect, some of the key areas where Softlogic has to focus on are Supply Chain
Management, Economies of Scale, Working Capital Management, Human Resources etc.

Conclusion
It is as per the above analysis, evident, that acquisition of ODEL by Softlogic can be considered
as a historical event in the retail business in Sri Lanka. However, Softlogic has to be vigilant with
regards to the financial management not only to maximize the wealth for the shareholders, but
also to repay the loans borrowed for the acquisition and then to take Odel to the next level of
retail shopping in Sri Lanka to fulfill the expectations of the stakeholders.

References;

Covey, S. R. (2005). 07 habits retrieved from www.cnn.com

DePamphillis, D. M. (2010) Mergers, Acquisitions, and other Restructuring Activities

5th edt. Academic Press London.

Gunawardane, O. (2014) Odel Acquisition Daily FT dated 2nd Oct 2014.

11

Interim Reports of Softlogic, as at 30th June & 30th sep 2014.

Mendalow Matrix retrieved from www.google.lk on 1st Jan 2015.

Mendis, T. (2014) Inevitable Change. Professional Bankers Magazine, 26th Anniversary

Publication, P.117

Official website of CSE retrieved on 29th Dec 2014 from www.cse.lk

Official website of ODEL retrieved on 28th Dec 2014 from www.odel.lk

Official website of CSE retrieved on 31stth Dec 2014 from www.softlogic.lk

Annexure 1: Financial Information Related to Ratios

(Values in Rs.)
As

at

31st As at 30th June As at 30th Sept

March

%
Change

Revenue

1,851,640,287

2,065,673,887

2,200,448,630

Operating profit

86,644,838

154,685,721

180,596,259

16.8%

Profit after tax

84,967,646

57,465,257

-32.4%

Non current assets

2,331,773,349

3,780,581,164

62.1%

Current assets

6,915,131,808

6,848,007,748

-1.0%

Current liabilities

5,817,993,497

4,368,979,584

-24.9%
12

Inventories

3,012,395,928

2,840,745,014

-5.7%

Non-current liabilities (group)

2,354,495,740

3,479,553,452

47.8%

Equity (group)

5,135,678,324

5,098,878,549

-0.7%

Finance costs

125,483,321

137,042,739

9.2%

Number of shares

779,000,000

779,000,000

0.0%

Total assets

9,246,905,157

10,628,588,912

14.9%

Capital employed

3,428,911,660

6,259,609,328

82.6%

Share price

13.80

15.90

15.2%

13