1. BACKGROUND

A. Future Retail Debt Situation

A significantly contributing factor which lead to Future Retail deciding to sell off their retail business is the current cash crunch being faced by the group since it defaulted on its Rs 100 Crore repayment on $500 million foreign currency bonds which was due last week. Over the years Future Group has accumulated heavy debt, which had been as high as Rs 12,778 Crore until September 2019 coupled with lack of funds to repay. With the worsening debt situation as much as 75% shares of future group have been pledged to the lenders. However, in addition to the default in repayment the triggering point that caused main shock was the COVID-19 crisis when Future Group’s most profitable venture, Big Bazaar had to be shut down due to the lockdown.

Being known as the Retail King, Kishore Biyani overburdened by debt which stood beyond the repayment capacity started looking for options, in which among others US Based retail giant Amazon (holding 3.2% shares in Future Retail) and Premjiinvest (holding 6% shares) showed interest. However, the deal got finalised with Reliance since it provided a comprehensive solution and make good the debt problems. Amazon may get shares in Reliance India Limited (“RIL”) subsequent to the transaction as a consequence of takeover.

B. Reliance Retail Solution

For Reliance, the rise to the top of retail business started 14 years ago. Today, Reliance retail network covers over 7,000 cities and towns with 12,000 stores making it the fastest growing retailer globally and ranked among the top 100.

In April 2020, in the middle of the most disruptive event in the human history in form of Corona crisis Facebook acquired 10% stake in Jio by investing Rs. 40,000 Crore in Jio. Additionally, Rs. 1.78 Lakh Crore of funds were raised within 12 weeks by selling 25% stakes and undertaking rights issue in Jio. While the market had been wondering whether the company would undertake expansion or repay its debts with the additional funds, Reliance in its Annual General Meeting held on July 15, 2020 cleared the air and doubts of the market by shedding light upon the company’s plan of acquiring and expanding its retail sector, which is in sync with Reliance’s vision and moto of growth.

The acquisition of Future Group’s retail business will add substantial value to Reliance’s venture into Jio Mart with a vision of creating a confluence of online and offline in the form of a backward integration into the supply chain. Future Retail has 1,500 retail stores which are spread across various sectors. The brands of Future Retail include-

  • Big Bazaar
  • Fashion at Big Bazaar (FBB)
  • Easyday
  • 300 stores under Central and Brand Factory
  • Ezone
  • Foodhall
  • Nilgiris

II. STAGE OF THE DEAL

A. At final Stage of Negotiation

With the negotiations between RIL and Future Group having started earlier this year, the deal has reportedly reached the final stage of negotiation with the deal value being finalised at Rs 24,000-27,000 Crore. With the terms and conditions been agreed upon and the deal reportedly finalised, it has now entered final stages and the deal is likely to be announced soon.

The negotiation had been prolonged due to-

  • Lack of consensus over the Valuation of Future Retail.
  • Kishore Biyani’s disinclination towards relinquishing complete control in retail.
  • However, the board members of Future have finally agreed upon final contours of deal and the resolution is to be passed anytime in the next few days. The shares hit the upper-circuit and were trading up 4.6% at around 10.25 am, on Monday.

B. Terms Finalised upon until now

In Brick-and-mortar space in India RIL will become the number one player across categories such as groceries, fashion and merchandise.

  • Future Group’s retail, supply chain and the combined related businesses will be taken over by RIL. Post the transaction all powers of Biyani in the retail sector will terminate.
  • Biyani to be left with control over FMCG section and some other smaller group companies of Future Group.
  • Presently, negotiation includes what would be Biyani’s role post the transaction.

C. Reliance’s Exclusivity on the Deal

According to reports RIL has the exclusivity on the deal until July 31, 2020 by which it needs to sign a binding agreement.

III. STRUCTURE OF THE DEAL

A. Takeover in form of Slump Sale

Future Group will have to undertake merger of three out of the six of its retail entities namely Future Retail, Future Lifestyle Fashion and Future Supply Chain Solution and then Reliance will acquire it.

According to reports Future Group will conduct a slump sale of its retail assets to one of the retail subsidiaries of RIL. The estimated transaction value also includes the liabilities of Future Group being planned to be absorbed by RIL.

B. RIL to absorb Future Group’s partnership with Foreign Brands and Retailers

A master franchise agreement has been signed between Future Retail and 7-eleven Inc. for developing and operating seven-11 stores in India. With no stores opened so far, the business is expected to go to RIL.

C. Massive Haircut on Debt

Future Group’s lenders have been asked by RIL for a massive haircut of about 30 per cent on the outstanding dues of Rs 600 Crore in addition to refinancing part of borrowing for a further period of 5-7 years. The bankers are highly likely to agree to the haircut since there is an inherent need for reviving the business which requires a strong promoter with deep pockets. Additionally, the bankers fear Bankruptcy and would be inclined towards Future Retail’s revival.

IV. MEGA PLAN BEHIND THE ACQUISITION

The vision behind acquiring Future Retail is two-fold-

  • Firstly, the Value, asset, loyal customers in future group.
  • Secondly, RIL has mega plans to enter E-Retail markets which is in sync with its plan of aggressive expansion. Also, because of COVID-19 business model is going to change extensively and E-Retail will become very valuable and instead of building it from scratch acquiring a readymade infrastructure is a feasible choice.

However, the question that remains is that are we heading towards a Monopoly which expands in Telecom, Digital and now even Retail?

V. WAY FORWARD: RETAIL WAR BETWEEN RELIANCE AND AMAZON OR BIG TECH JOINING HANDS TO CONQUER INDIA?

To compete with Amazon, Reliance had previously announced ‘Jio Mart’. Reliance’s plan of competing with Amazon is now clear, starting with enabling whatsapp payment for Jio Mart after its partnership with Facebook and various tech innovations. Now if future group’s huge supply chain & retail infrastructure is acquired it will be a huge deal and will add a new dimension to the much touted Ambani-Bezos (Amazon CEO) battle.

However, Amazon is currently in talks to acquire 9.9% preferred, strategic stake in Reliance Retails for Jio Mart. With Amazon’s unfulfilled ambition after Flipkart being acquired by Walmart, of consolidating with local partners to smoothen its play in India, Amazon is likely to smoothen its Indian government relations and strengthen e-commerce hold along with Reliance Retail.

Reference:

1. ‘RIL likely to acquire Future Group’s retail biz for Rs 27,000 crore: Report’ ET Now dated July 28, 2020.

‘2. RIL nears deal to acquire retail biz of Future Group’ on The Times of India by Madhav Chanchani and Digbijay Mishra, dated June 30, 2020.

3. ‘RIL may buy Future Group’s retail biz for Rs. 27,000 crore’ on LiveMint by Suneera Tandon and Deborshi Chaki, dated July 28, 2020.

4. Reliance 43 AGM held on July 15, 2020.

5. ‘Reliance Is Buying Big Bazaar, Future Group’s Retail Business to Become India’s #1 Retailer; Rs 27,000 Crore Is The Deal Size’ on Track.in by Malvika Gurunj dated July 28, 2020.

6.  Amazon To Invest In Reliance Retail: Is Big Tech Joining Hands To Conquer India?’ on Inc42.com by Bhumika Khatri dated July 23, 2020.

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Disclaimer: The contents of this article are for information purposes only and do not constitute an advice or a legal opinion and are personal views of the author. It is based upon relevant law and/or facts available at that point of time and prepared with due accuracy & reliability. Readers are requested to check and refer relevant provisions of statute, latest judicial pronouncements, circulars, clarifications etc before acting on the basis of the above write up.  The possibility of other views on the subject matter cannot be ruled out. By the use of the said information, you agree that Author / TaxGuru is not responsible or liable in any manner for the authenticity, accuracy, completeness, errors or any kind of omissions in this piece of information for any action taken thereof. This is not any kind of advertisement or solicitation of work by a professional.

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