At times when the retail world is still learning to live in the ‘new normal’ world amidst apprehensions of what this ‘new normal’ has to offer, nothing excites the industry more than mergers, partnerships, and acquisitions. That’s what India witnessed recently, when Asia’s richest man Mukesh Ambani’s Reliance Retail, a subsidiary company of Reliance Industries Limited (RIL), finalised an almost Rs. 25,000 crore deal. And how!
RIL has managed to attract the attention of global retail sector with every deal or agreement it has done over the recent years. Not surprisingly, considering RIL remains to be India’s numero uno retailer, attracting global investments every second day. The company recently brought as much as Rs. 152,000 crore (US $ 21.7 billion) from major global players by selling 33 per cent of its stake in Jio platforms – prominent ones being Rs. 43,574 crore (US $ 5.7 billion) from Facebook and Rs. 33,737 crore (US $ 4.5 billion) from Google.
Here it is also important to mention that Reliance Retail, as per reports, has almost completed negotiation with American private equity investor Silver Lake to offload 1.7 to 1.8 per cent stake for around Rs. 7,500 crore (US $ 1 billion) in an attempt to raise funds.
The investment holds significance, as it would value Reliance Retail at about US $ 57 billion (around Rs. 4.3 lakh crore), and comes as RIL is planning to offload about 10 per cent in new shares.
So when Reliance bought Future Group – owned by Kishore Biyani, who was once hailed as India’s retail king – for an astounding Rs. 24,713 crore or US $ 3.4 billion (including debt), the entire country started tracking every development of the deal. Coming in the wake of the company buying majority stake in pharmacy retailer Netmeds in August 2020, the mega deal with the Future Group has today made RIL the undisputed leader in India’s organised retail sector. Additionally, it also gives RIL that extra impetus to carry forward its tussle for supremacy with Future’s digital partner Amazon in the Indian e-commerce world.
As a part of the deal, Future Group has merged some of its remaining businesses into Future Enterprises Ltd. (FEL). Notably, the retail and wholesale undertaking is being transferred to Reliance Retail and Fashion Lifestyle Limited (RRFLL), a wholly-owned subsidiary of RRVL (Reliance Retail Ventures Ltd.). RRFLL has then proposed to invest Rs, 1,200 crore in the preferential issue of equity shares of FEL to acquire 6.09 per cent of post-merger equity, and Rs. 400 crore to acquire warrants convertible into 7.05 per cent of FEL shares.
The deal also clearly states that Kishore Biyani and his family members will not be, reportedly, allowed to re-enter the retail sector for the next 15 years under a non-compete clause. There is, however, an exception, of home retailing, where RIL still doesn’t have any presence. The deal is applicable for all existing retail businesses both online and offline.
Interestingly, there were no physical meetings between Kishore Biyani and Mukesh Ambani due to the pandemic and all discussions were held through video conferences.
So how’s RIL gaining from the deal?
The deal helps Reliance Retail to increase its retail store footprint by 23.8 million square feet, thereby adding to its existing 28.7 million square feet. That’s 52.5 million square feet – 2.5 times of DMart, and also higher than Tesco, the world’s third-largest retailer. Reportedly, the assets are being acquired as growing concerns on a slump sale basis.
According to a recent study conducted by Boston Consulting Group and the Retailers’ Association India, the partnership will extend Reliance Retail’s leadership in a sector that is predicted to be worth US $ 1.3 trillion by 2025 from US $ 700 billion in 2019. Besides, it now gives Reliance Retail control over a network of almost 1,800 stores and further brings in Rs. 30,000 crore in additional sales to create a Rs 1.89 lakh crore or US $ 26 billion retail empire.
Another area of focus for RIL is to expand its e-commerce business in the country. Future’s partner Amazon has expressed its intent to expand in India by planning to invest US $ 1 billion to help small businesses. However, it’s certainly losing its hold, especially following RIL’s acquisition of Future’s retail and logistics units. Notably, RIL has also ensured that Amazon does not become its shareholder.
Back in May 2020, Amazon considered increasing its stake in Future’s retail unit to as much as 49 per cent; however, it didn’t work out at that time for Future Group, which was struggling to pay debt in a pandemic-hit economy. RIL, meanwhile, either kept on acquiring majority of stakes in big firms or was busy negotiating deals that also included its plans to take over Zivame, a lingerie maker, for US $ 160 million (that’s somewhere around Rs. 1,200 crore).
What’s it going to be for the Future Group?
The acquisition deal has been significant for the Kishore Biyani-led Future Group that faced the heat from the SBI-led lenders’ consortium to address its fast-increasing debt that stood at Rs. 12,778 crore as of September 2019.
In an officially released statement, the Future Group has said, “Post this exercise, FEL will emerge strong with businesses in manufacturing and distribution of FMCG products and integrated fashion sourcing and merchandising. These businesses will further benefit from supply agreement with Reliance Retail. This deal will also enable FEL to focus on the creation of new-age brands in the FMCG and fashion space and expand its reach. The transaction will help FEL to expand with a focussed business model and a stronger balance sheet.”
More on the same, Kishore Biyani, Group CEO, Future Group, shared, “As a result of this reorganisation and transaction, Future Group will achieve a holistic solution to the challenges that have been caused by the pandemic and the macro-economic environment. This transaction takes into account the interest of all its stakeholders including lenders, shareholders, creditors, suppliers, and employees giving continuity to all its businesses.”
The acquisition is, importantly, something to cheer about for the lenders of the Future Group who will now have secured outstanding loans protected as well as the retail ecosystem comprising small businesses and suppliers. Additionally, even the employees of the Group, who otherwise feared salary cuts and job losses, could now get absorbed into RIL, as it is on an aggressive expansion journey. “Everyone who is part of Future Group today will have a role in the future of this business as well,” substantiated Kishore.
Besides, it is important to note here that back in 2017, Kishore Biyani had demerged his home retail business under Future Retail and listed it as a separate company under Praxis Home Retail (PHRPL). At present, Praxis Retail manages around 48 HomeTown stores that generated revenue of Rs. 702 crore in the last fiscal, and importantly, it is not part of the RIL takeover deal.
While many industry experts believe that most of the non-compete agreements, mainly, are valid for 3 to 5 years, the financial crisis may lengthen the duration. Ashish Kumar Singh, Managing Partner, Capstone Legal, talking to media, shared, “It is also fairly common for the old management to continue after the acquisition; however, in this case, we believe it’s not possible for Biyani management to continue under Reliance.”
Conforming to what Ashish said, Harminder Sahni, Founder of retail consultancy Wazir Advisors, averred if the non-compete clause is for 15 years, it means Kishore Biyani has no interest in doing retail business ever.
By saving the debt-ridden Group from going insolvent, RIL has also widened the horizon of its customer base. It’s huge now! Harminder said, “Reliance has essentially removed one competitor from the market and added Future’s loyal customer base to its own portfolio.” The deal has taken RIL to a position, where it is a major threat to not just Amazon or Flipkart but also to the likes of DMart.
Market expert Varinder Bansal said, “The revenue of Reliance Retail is expected to shoot up by 25-30 per cent from here. Besides, the firm has acquired this entire asset at a very cheap valuation considering the current circumstances. Importantly, it has been able to double its capacity with just one deal.”
Speaking on the mega deal, Isha Ambani, Director, Reliance Retail Ventures, said “With this transaction, we are pleased to provide a home to the renowned formats and brands of Future Group as well as preserve its business ecosystem, which have played an important role in the evolution of modern retail in India. We are committed to continue providing value to our consumers across the country.”
There’s no doubt that it’s been a win-win deal for RIL, but for the Future Retail, it’s been more to reduce the debt load than anything else. Importantly, it gives the latter a chance to stay in business, as the RIL deal will keep it away from all troubles. Next few months will clearly tell us how strongly RIL has been able to establish its omnichannel supremacy.