Reliance Retail and Future Group; and now we are one!

The detailed scheme of arrangement is yet to be announced but it is evident that this deal is being done by way of a slump sale.

Aug 31, 2020 10:08 IST India Infoline News Service

RIL6
The much talked about deal between the Reliance Retail and Future Group finally happened. Reliance will pay a sum of Rs24,713cr to the Future Group for its entire customer facing businesses including retail, wholesale, logistics and warehousing. This amount will include the assumption of debt and Biyani will only get the balance.

The detailed scheme of arrangement is yet to be announced but it is evident that this deal is being done by way of a slump sale. A slump sale typically means that a lump sum consideration is agreed upon and no individual values are assigned to specific assets and liabilities of the company.

Deal begins with a merger of Future Group companies

As part of the deal, Reliance Retail will directly take a stake in Future Enterprises Ltd (FEL). However, prior to that, there will be a merger of group companies into Future Enterprises. The swap ratio with FEL for the group companies has already been decided as under.
Company Merged
into FEL
Swap Ratio for the shareholders Implied Price in the merger deal Premium / Discount
to CMP (*)
Future Consumer 9 shares of FEL for every 10 shares held Rs18.00 +57%
Future Lifestyle 116 shares of FEL for every 10 shares held Rs232.00 +60%
Future Retail 101 shares of FEL for 10 shares held Rs202.00 +49%
Future Supply Chain 131 shares of FEL for 10 shares held Rs262.00 +74%
Future Market Networks 18 shares of FEL for 10 shares held Rs36.00 +35%
(*) – Refers to closing price on 28 August 2020
Data Source: Company Filings

The deal has been value accretive for the shareholders of various Future Group companies because all shareholders have managed to get a premium to their last traded price. This premium has ranged from 35% at the lower end of the spectrum to 74% at the upper end. Additionally, the logistics and warehousing business will be directly transferred to Reliance Retail Ventures and RRVL will also infuse fresh investments into Future Enterprises.

What is in the deal for the Future Group?

For the Future group, it avoids the embarrassment of another default. Future group has total bank debt to the tune of Rs.12,500 crore, which will be fully assumed as part of the deal by Reliance Retail. It does look like banks may not have to take any significant haircut on their debt to the Future group.

While Biyanis may lose control of the Future retail brand, the fact is that the brand survives and is now in safer and stronger hands. In retrospect, Kishor Biyani was consistently stretching himself and his company. While the shift to ecommerce was happening, COVID-19 proved to be the last straw on the camel’s back.

Post the deal, Biyani retains control of the manufacturing franchise, the FMCG business and the insurance alliance with Generali. The promoter group has debt of Rs.11,900 crore from banks and that could entail a haircut for banks up to 30-40%. How much of the business remains with Kishor Biyani after the promoter loans, remains to be seen. But the good news is that the brand survives and has the promise of a stronger balance sheet as well as funds infusion by the Reliance Group.

How Reliance stands to benefit from the deal?

In the last 5 months, Reliance has monetized digital assets and raised rights worth close to $30 billion. It has a war chest to expend on acquisitions. Future Group had been on the radar of Reliance Group for some time.
  • With the Reliance Group identifying consumer facing businesses like retail and digital as the growth engines, this acquisition perfectly fits into the Group’s larger scheme of things.
  • Apart from getting leadership position in grocery and fashion, Reliance also gets additional synergies by leveraging the supply chain business of Future group to scale up the Jio platform to the next level.
  • One thing missing in the Reliance jigsaw puzzle was strong retail brands for deeper ROI. Apart from the 1500 stores of Future Group, Reliance gets access to high mindshare brands like Big Bazaar, Easyday, Nilgiris, Central and Brand Factory.
  • The scale and the online / offline combination will allow Reliance to match up to the muscle of Amazon and Wal-Mart in India. At the same time, Reliance also boasts of a retail and logistics franchise that can take on D-Mart.
However, there are some concerns that Reliance will have to address with respect to the business model. Currently, Future group has inventory churn days of 100 days while D-Mart does it in 30-days. That explains the Future group’s negative operating cash flows. Secondly, RIL gets 23 million SFT of retail space and it needs to really evaluate whether the old mall model still works. These would be hard decisions that Reliance will have to take in the next few months to really leverage the deal to the hilt.

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