The Big Season Sale

Kishore Biyani’s Future Group in Reliance’s shopping cart in the Big Bazaar of India’s mergers. 

Since the novel coronavirus outbreak delivered a body blow to mergers and acquisitions (hereinafter M&A) the world over, M&A bankers have been sighing in despair as they witnessed new-found technical concerns and legal snags derailing deals one after the other in an increasingly uncertain world. But over the last weekend, the M&A pundits in India have had a lot to discuss and dissect as Kishore Biyani, once touted as the king of India’s retail sector capitulated to the new Czar of Indian retail – Mukesh Ambani. The potential impact of this merger is not lost on anyone. Reliance, even before the merger, was a giant in the retail sector with a finger in every pie – from groceries to electronics. It raked in ₹1.3 lakh crore (first retail company to cross the ₹100000 crore mark) in FY2019 as the largest retailer in India. Future Group’s acquisition further bolsters its claim as it is slated to see its market share grow to 17.8% and when the sale of non-essential items in the country has plummeted by 80%, this may finally bring some cheer to the beleaguered market that is staring at an 18-month wait to return to pre-Covid19 levels. In this article, we declutter the deal and analyse its implications for the consumers and competitors. 

The Deal 

Let us pore over the particulars of the deal before we venture to comment on the nature of the deal and who stands to benefit the most from it. While every publication worth its salt has clinched the ₹24,000 crore headline, the deal will itself take place according to a 3-stage process: 

• Future Group will merge its listed entities into a new entity called Future Enterprises Ltd (hereinafter FEL) according to the following exchange scheme:
  1. a) FEL will follow the given swap ratios 
     1. i) 9 shares for every 10 shares of Future Consumer Ltd (FCL)
     2. ii) 101 shares for every 10 shares of Future Retail Ltd (FRL)
     3. iii) 116 shares for every 10 shares of Future Lifestyle Fashions Ltd (FLFL)
     4. iv) 131 shares for every 10 shares of Future Supply Chain Ltd (FCL)
     5. v) 18 shares for every 10 shares of Future Market Network Ltd (FMNL)
  2. b) All shareholders of Future Group are, therefore, very well placed to earn anywhere between premiums between 35% and 74% 2) FEL shall then transfer all assets related to retail, wholesale, logistics and warehousing to Reliance Retail in a slump sale
• Reliance Retail will invest an amount of ₹2800 crore (included in the eye-catching ₹24,000 crore figure) in FEL to acquire up to a 13% stake in the company. 

Slump Sale: Transfer for undertaking for a ‘lump sum’ without attaching value to every underlying asset or liability individually 

Call Option: A non-obligatory financial contract that grants the buyer the right to buy a stock/bond at a pre specified price within a specific time period (in this case it was between the 3rd and the 10th year). 

The Circumstances 

This deal is extraordinary not only because of the enormous size and clout that it bestows on Reliance but also due to the less-than-ideal environment of pervasive gloom and doom in which it has come to fruition. A cursory glance at the headlines from the world of M&A – Xerox brought its hot-heeled pursuit of HP to a grinding halt, Softbank reneged on its $3 billion promise to WeWork, GrubHub jilted Uber at the altar, AstraZeneca dropped the much talked about a potential merger with Gilead – and it is apparent why this deal has brought relief of optimism to many a banker. But do not let this air of cheer distract you from the origins of the deal which lie in the realm of deep despair and frustration. It would hardly be an exaggeration to say that the Future group found itself up to its eyeballs in debt courtesy of a rapid expansion plan gone awry and the nationwide lockdown that thwarted its attempts at bouncing back. Things were so bleak that the Future Group was on the verge of defaulting on its $500 million foreign currency bond in July. It averted defaulting by the skin of its teeth by coughing up $14 million for interest payments during the 30-day grace period. Therefore, it is a no-brainer that this deal will prove to be Future Group’s deliverance from bad debt. It looks forward to repaying some of the dues from the proceeds of this deal while bequeathing its debt of ₹12,500 crores to Reliance. But one should not for a minute believe that Mukesh Ambani has decided to do Kishore Biyani a good turn without claiming his pound of flesh. The former king of retail, Biyani, under a tough non-compete clause, has been exiled for 15 years from the very sector he spearheaded for the longest period. Thus, the fine print of the deal may have pronounced Biyani’s retirement from the retail sector after 3 decades of ups and downs. 

The Impact 

The deal will firmly establish Reliance Retail as the world’s third-largest retailer controlling 53 million square feet of retail real estate. Brands like Big Bazaar and HyperCity will boost Reliance’s grocery business by doubling the number of stores to 2000. Reliance also stands to gain the loyal customer base nurtured by the Future group over the years. All this ensures that Reliance will wield greater bargaining power at the negotiating table with suppliers and landlords. Given these changes, Reliance hopes to bump up revenue for this year to ₹1.93 lakh crore. Its warehousing capacity is also predicted to rise by 80% and one may be forgiven for not realising the true impact of this until one view it in conjunction with the advent of JioMart. JioMart was envisioned as a serious challenger to Amazon and Walmart’s Flipkart but until the pandemic struck it had shown little promise. However, we are of the opinion that all this may soon change as apart from capitalizing on Future’s wholesale and warehousing facilities, Reliance may also use the countrywide network of Nilgiri’s, Easyday, and Heritage Fresh stores (affiliated with the Future Group) and their WhatsApp delivery network to provide a fillip to the fledgling JioMart. It is quite interesting to note how the acquisition of a brick-and-mortar retail chain also has ramifications in the e-tailing market. In fact, apart from the threat of an invigorated JioMart cannibalizing competition, there is another important consequence for the e-tailing giant Amazon. Amazon had in 2019 acquired a call option over Biyani’s stake in the Future Group. If Reliance had acquired the Future group companies instead of the retail assets, Amazon would have become a shareholder in Reliance too. Thus, the elaborate deal structure mentioned above has, at its heart, the idea of thwarting a rival’s advance. Amazon shall now only be entitled to the FEL shares under the terms of the merger. 

Foreign Currency Convertible Bond or FCCB: A convertible bond (bonds that give the holder the option to convert the bond to stock) that is issued in a currency different from the issuer’s home currency. In this case the bond was issued in dollars with the maturity date of 2025. 

However not everything is rosy about this deal. Apart from the harsh exile imposed on Biyani and his family members, possible job losses for the employees of Future Group is another fly in the ointment. While Reliance prides itself in its lower-than-market-average operation costs, Future Group is infamous for its high employee expenses (5% of sales compared to Reliance’s employee expenses of around 1% of sales). Some warn that due to considerable overlap between the two retail chains, 15% of Future’s employees may be staring at job losses. Moreover, alarm bells have already begun ringing in the sector over fears of a Jio-like cannibalisation of competition. There are also sound suspicions that this deal threatens to make the market a monopolistic one. 

Whether the optimism in the market prevails over the threat of monopolization, whether the premium earned by the shareholders outweighs the possible job losses are questions that only time will answer. But as of today, RIL has shown vision and gumption and we hope that this deal heralds the resumption of activity in the M&A space. 

— Avichal Agrawal (Co-founder editor)