Amazon may be pushing Future Group into a tight corner

Amazon got a boost during the week after the Supreme Court barred Reliance and Future group from closing the merger deal.

Feb 25, 2021 08:02 IST India Infoline News Service

The Rs23,470cr merger deal between Reliance Retail and Future group has been hanging fire for over 6 months. While the deal has been sealed and is acceptable to Reliance and Future group, the roadblock to the deal has come from Amazon. Amazon got a boost during the week after the Supreme Court barred Reliance and Future group from closing the merger deal. The final judgment may take a few more months but the Supreme Court has asked both the merging parties to hold on till then. The big question is whether Future group can survive with its pile of debt. Check the chart.

Data Source: Company Filings
How is Amazon concerned with the RIL / Future group deal?

Future group and Reliance Industries may have signed off on the merger deal in August 2020, but the relationship between Amazon and Future group actually precedes that. It is an interesting and indirect relationship but that has become the bone of contention and also the lever on which Amazon wants to scuttle the deal.

Back in 2019, Amazon had acquired a 49% stake in unlisted Future Coupons, part of the Future group. While it gave them a stake in Future Retail, it also conferred in them the right to buy into the flagship company at a later date. Current FDI regulations do not permit Amazon to hold a majority stake in a retail venture so this was a stop-gap till the rules changed.

Amazon had objected to the RRIL/Future deal on 3 counts. Firstly, Amazon alleged that the sale to Reliance breached a contract between Amazon and Future Coupons. The contract bars Future Group from selling its retail assets without Amazon’s consent. Secondly, the agreement also barred Future group from entering into any stake sale deal with any competitor and Reliance had been identified as one of them. Lastly, any proposal by Future group to sell a stake would give the first right of refusal to Amazon, which Future group did not adhere to.

How the legal battle between Amazon and Future group panned out?

After the RRIL-FEL deal, Amazon first approached the Singapore International Arbitration Centre (SIAC) to adjudicate on the deal. In October, the SIAC called for the deal to be put on hold pending a final verdict. However, as per Indian regulations, such arbitration panel decisions have to be ratified by a court in India for it to be effective.

Amazon had approached the Delhi High Court which had initially ordered to put the transaction on hold but later another bench of the Delhi High Court allowed the deal to go through. Amazon also wrote to SEBI and the stock exchanges not to approve the merger due to the SIAC order. SEBI, however, approved the deal with the caveat that the outstanding legal case be explicitly disclosed.

Finally, the Supreme Court which ordered the merger deal to be held up till the final verdict, which could take a few more months. Effectively, the deal is not happening immediately. Supreme Court has effectively ratified the order of the SIAC to put the deal on hold till the final order is passed.

Why Amazon was jittery about the deal?

For Amazon, it was less about Future group and more about Reliance. The online market in India is split between Amazon and Wal-Mart to the tune of 75%. In Reliance, Amazon sees a company with digital assets, vision, deep pockets and patience to make ecommerce happen. Amazon was worried that the deal would give Reliance, India’s biggest offline retailer, a national footprint including marquee brands like Big Bazaar and Foodhall.

Jio Mart has 25% of the estimated $86 billion Indian ecommerce market. Currently, Amazon and Jio Mart are in a race to gain first-mover advantage in integrating millions of Kirana stores. Jio Mart had an edge with its telecom franchise and tie-ups with WhatsApp. Jio Mobile also has 40 crore customers and Future deal would have enhanced that edge.

Amazon is pushing Future group into a tight corner

Reliance had moved quickly in August when Future Group was on the verge of default. Not much has changed and the only reason Future group survived is that most of the Future store merchandise comes from Jio Mart with extended credit terms.

The Future group had long been stretching itself and the COVID lockdown exacerbated it. Future Group’s counsel, Harish Salve, argued that further delay in the process could expose Future group to liquidation and put nearly 25,000 jobs in danger. The real problem is that Future group’s debt is huge and time is short.

Future group’s survival depends on this deal. It defaulted on debt in Aug-20 and missed interest payment on dollar bonds in Jan-21. Future group posted losses for 4 straight quarters so net worth is largely eroded. Eventually, the issue of protecting thousands of jobs may be the clinching factor for courts and that would not be a bad deal for the Biyanis!

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