RELIANCE AND FUTURE GROUP –A MUCH AWAITED DEAL BY THE MARKET

BACKGROUND:

The Indian stock market, business news channels, and investment pandits all were anticipating the acquisition of the retail business of Future Group, a group created by the none other than Mr. Kishore Biyani, who changed the shopping style of Indians in the real sense and having one of the largest retail chain in India will be acquired by the largest conglomerate of India i.e Reliance Industries Limited (RIL) after the mega-deal of Reliance Jio by Mr. Mukesh Dhirubhai Ambani.

This anticipation was turned out to be true when on the eve of 29th August, 2020, Reliance Industries Limited via it’s press release uploaded on the web portal of the Company along with regulatory filing to the stock exchange, announced to acquire retail & wholesale business and the logistics & warehousing business of the future group under it’s subsidiary, Reliance Retail Ventures Limited (RRVL), at a price consideration of Rs. 24,713 Crores on a slump sale basis.

Meaning of Few Key Terms pertaining to the Deal

1. Slump Sale: Slump sale’ is nothing but transfer of a whole or part of business concern as a going concern; lock, stock and barrel. As per section 2(42C) of Income -tax Act 1961, ‘slump sale’ means the transfer of one or more undertakings as a result of the sale for a lump sum consideration without values being assigned to the individual assets and liabilities in such sales.

2. Swap Ratio: A swap ratio is a ratio at which an acquiring company will offer its own shares in exchange for the target company’s shares during a merger or acquisition. When two companies merge or when one company acquires another, the transaction does not have to be an outright purchase of the target company’s shares with cash. It can involve a stock conversion, which is basically an exchange rate, described through the swap ratio.

3. Preferential Allotment of Shares: Preferential allotment of shares means the bulk allotment of fresh shares to a specific group of individuals, venture capitalists, companies, or any other person by any particular company.

4. Share Warrant: A stock warrant represents the right to purchase a company’s stock at a predefined price and at or before a specific date.

Summary of the Deal:

1. The date of agreement is 29th August, 2020.

2. Reliance Retail Ventures Limited will pay INR 24,713 crore to Future Enterprise Limited (FEL) for the acquisition of retail & wholesale business and the logistics & warehousing business of the future group. Modus operandi of payment is not disclosed as yet.

3. Total 19 entities of future group consisting listed entities and unlisted Entities engaged in various business segments will be merged in the Future Enterprises Limited and The Logistics & Warehousing, Retail & Wholesale undertakings simultaneously will be transferred to Reliance Group.

4. Merger of the aforesaid entities will be based on the Swap Ratio and no cash will be paid by the Future Enterprises to the shareholders of the merged entities.

S. No. Name of the Entity Swap Ratio
1 Future Consumers Limited (FCL) 9 Shares of FEL will be issued against 10 shares of FCL
2 Future Lifestyle Fashions Limited (FLFL) 116 Shares of FEL will be issued against 10 shares of FLFL
3 Future Market Networks Limited (FMNL) 18 Shares of FEL will be issued against 10 shares of FMNL
4 Future Retail Limited (FRL) 101 Shares of FEL will be issued against 10 shares of FRL
5 Future Supply Chain Solutions Limited (FSCSL) 131 Shares of FEL will be issued against 10 shares of FSCSL

Other 14 entities are wholly owned subsidiaries of the FEL, hence, no shares will be issued.

5. Group entities of RIL will be allotted 1,58,64,02,265 equity shares of FEL at a price of Rs. 17.65 for an aggregated consideration of Rs. 2,800 Crores for 13.14% stake in the FEL over the period of 18 months by way of preferential allotment and issuance of share warrant.

Reliance the real beneficiary of Deal

Shareholders of RIL are the real beneficiary of this mega acquisition deal made by the Conglomerate. The market was expecting the deal at a price consideration in the range of 29000 Crores to Rs. 30,000 Crores while the actual deal has been made for only Rs. 24,713 Crores, an astonishing discount of approximately 20%. Further, to add RIL will be issued    1,58,64,02,265 equity shares by way of preferential allotment and issue of share warrant of FEL at a price of Rs. 17.65 for an aggregated consideration of Rs. 2,800 Crores. The last trading price of FEL on BSE was Rs. 20.20, again a tremendous discount of 13% approximately.

Apart from the great pricing and valuation obtained by the RIL, RIL will be having one of the largest infrastructures for boosting it’s retail business which couldn’t be possible to build, even by the RIL in such a short time.

Elimination of one of the competitors and large scale operations shall create wealth for the shareholders of RIL in the upcoming days.

Ray of Hope for the shareholders of Future Enterprises Limited

For Expansion of business you need Debt, but you can not run the business, if unable to serve the debt. Shareholders of the FEL and Kishor Biyani was facing the same kind of situation, wherein he expanded the retail chain business very aggressively on debt ignoring the change of behavior of the customer and emerging trend of online shopping. The FEL was overburdened with the debt resulting in thin profits or losses for the company in the past, the group was further shaken by the recent pandemic Covid-19, wherein the company had no sales at all and it was difficult to maintain the expenses as well for the Corporation. Kishor Biyani had no other choice except to find a buyer and sale FEL assets at a distressed valuation to an investor to meet FEL debt obligations.

Shareholders of FEL now may hope that their company will become the debt free/less burdened with the debt and their company performs well in the remaining sectors which may create wealth for them. 

Arbitrage opportunities for the shareholders of target companies:

Shareholders of the above mentioned target companies which are listed on stock exchange have arbitrage opportunities in their hand which is herein below:

Name of the Company Last traded Price Swap Ratio Worth of shares tendered Worth of shares Received Arbitrage Arbitrage %
FEL 20.20 NA
FCL 11.48 9 Shares of FEL against 10 shares of FCL  114.80 181.80 67 58.36
FLFL 145.10 116 Shares of FEL against 10 shares of FLFL 1451 2343.20 892.20 61.48
FRL 135.25 101 Shares of FEL against 10 shares of FRL  13521352.50 2040.20 687.70 50.85
FSCL 151.05 131 Shares of FEL against 10 shares of FSCSL  13521510.50 2646.20 1135.70 75.19

Bankers get their loan back

Out of the deal, bankers will get their money back which will be a sigh of relief for the banks, as the money loans were at the edge of being declared NPA.

*****

Disclaimer: The Content is for informational purposes only, you should not construe any such information or other material as legal, tax, investment, financial, or other advice. All Content in the article is based on the information available on NSE Website which is of a general nature and does not address the circumstances of any particular individual or entity. Please evaluate and discuss with your financial advisor before making any investment decisions. The above views are personal views in nature.

Authored By- CA Kanj Goel – Kanj3101@gmail.com

Author Bio

Name: KANJ GOEL
Qualification: CA in Job / Business
Company: Tradex India Corporation Private Limited
Location: NEW DELHI, New Delhi, IN
Member Since: 04 Aug 2020 | Total Posts: 11
Chartered Accountant having 10 years+ experience in Taxation Advisory, Financial Advisory, Financial restructuring, Funds Management, Consolidation of accounts, MIS. Stock Market Investor, Learner, Reader. View Full Profile

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22 Comments

  1. Mahesh says:

    Sir what to do of future retail shares ? Stuck at price of 140. Will I get Reliance shares at good prices after FEL merger or incur losses ? Should I sell in loss or continue for long-term in hope of profit ?

  2. Anurag says:

    Nice Article Mr Goel, very informative.
    Just want your thoughts on 24K slump sale that happens, I believe 13K is outstanding loan.
    Hence FEL shareholders should be left with 11K, which is approx Rs 9 per share considering 1200 Crs shares of FEL after merger. Hence apart from 2 Brands + Insurance business they should have that cash for their businesses.
    Am I reading this correct?
    Thanks

    1. KANJ GOEL says:

      Hi Anurag,
      Thanks for appreciating the endeavors, existing scheme doesn’t provide much details, per se it seems like this only but one needs to wait for any final comment.

    2. Kanj_goel says:

      Hi Anurag,
      Thanks for appreciating the endeavors, per se existing scheme draws the conclusion on same line, for final conclusion one has to wait for final details of the scheme.

  3. Anand Singh says:

    Respected sir

    I think it was a trap game by biggest business tycoon , who intentionally did this trap and ultimately common people invested I feel I am right

    They are playing with people

    I never invested in share just started it in and I am trapped with 50k

    1. KANJ GOEL says:

      Anand,
      This is what retail investors always complaint. Share Market is the game of operators, it’s a game of manipulation, you will always lose money in it, while the true fact is everyone tries to be a direct equity investor or derivative trader, and no homework is done before investing.
      I hope you learn the lesson with the minimum amount and don’t repeat such mistakes in future, start investing in Mutual Funds and reading about market, once you are ready then invest in good companies only.

  4. Kirit says:

    Dear Sir,

    Good Article by you for information including worth of Share and Arbitrage…

    I have confusion as Normally Trading before Swip, Price or Demand of Share goes to Higher side (as RIL also leader in market who going to invest) but seen downtrend in all of Future Group…. Can we Hold or Buy deeply??

  5. Surendra Daga says:

    Today Future Supply trading @129.2 so as per swapping ration FEL price after swapping should be @9.86 ..just to confirm that swapping informed to exchange is confirmed or still need approval or may change ..thanks

    1. Kanj_goel says:

      Dear Surendra,
      Legally they need approval and swap ratio may also get changed, however, practically it never gets changed and whatever swap ratio is declared based on valuation is final.

  6. Kanj_goel says:

    Dear Readers,
    Thanks, for digging out time out of your busy schedule for reading the article and commenting on the same.
    A few readers have started discussing their personal holdings on the same, I request to them please maintain the decorum of the platform and do not discuss the same here.
    See, before commenting on any holding you need to amalyse various aspects of investments made by the investor i.e Size of portfolio, date of investment, time horizon, risk appetite, investment objective, etc hence, the same can not be done on this public platform. Whosoever, wishes to discuss their personal holdings please do contact in person instead of posting on this.

    Thanks
    CA Kanj Goel
    9015980399
    kanj3101@gmail.com

    1. Kanj_goel says:

      Mr. Amit,
      Future retail will be merged into Future Enterprises on the record date to be announced after obtaining the requisite approvals for the scheme of amalgamation, merger, hence, 29th August, is not the relevant date for any matter other than the determination of swap ratio.

      Happy Investing
      Kanj Goel
      9015980399

    2. Kanj_goel says:

      Mr. Amit,
      Future retail will be merged into Future Enterprises on the record date to be announced after obtaining the requisite approvals for the scheme of amalgamation, merger, hence, 29th August, is not the relevant date for any matter other than the determination of swap ratio.

      Happy Investing.
      Kanj Goel
      9015980399

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