Cash-strapped Kishore Biyani offered to sell a significant stake in his crown jewel Future Retail, as the retail giant tries to pare its debt levels. Future Group is also considering demerging the food business of Future Retail into an independent entity. Future Retail has more than 1,500 stores across 437 Indian cities and towns. The food business accounts for a major chunk of sales in Future Retail’s flagship Big Bazaar.

Future Group

Mukesh Ambani-led Reliance Industries is close to finalising a deal with the Future Group for buying stake in some of its group companies. An announcement in this regard is expected to come next month according to a Bloomberg report. Although Future Retail has buyers waiting, including Amazon, Aion Capital, Samara Capital and billionaire Azim Premji’s Premji Invest. A bid from Reliance Industries to buy stake in the holding company could generate favourable results for it.

Future Group’s debt woes

Biyani realised the potential of the organised retail sector far before cash rich promoters like the Ambanis or the Birlas did. No wonder, he is well known as the Retail King of India. The pandemic has, however, disrupted the operations of his companies. The group was completely dependent on cash flows of companies to pay off debts.

Future Group’s listed companies had a total debt of Rs 12,778 crores in September, 2019 with total collateral pledge estimated at over 90%. This implies that in case of failure to pay the above loan, 90% of the loan can be recovered by sale of assets of the company. Working Capital loan of the group is also quite high at Rs. 2,125 crores.

Debt burden of future group
Image Credit: The Economic Times

Advance talks with Reliance

As part of the moratorium relief extended to Indian Companies by the government, Future Group’s lenders cannot sue it for loan defaults. Soon after the group defaulted on loans to UBS Bank and IDBI Trusteeship Services Ltd., lenders have suggested a buyout or a deal with another retail giant to restructure Future Group’s loans. Amazon already holds nearly 3.6% stake in India’s largest listed retail entity Future Retail through a 49% holding in Biyani’s Future Coupons.

Another deal with Amazon or with Walmart is quite likely but Mukesh Ambani’s Reliance, which recently took its retail business online, could generate favourable results for the entities. Some of these are as follows:

Speed is the essence

While Reliance may not be the only suitor for Future Group, it is known for its penchant for speed in executing such deals. In the Jio Platforms monetization, RIL showed its capacity to close out mega deals in a short period of time. If RIL is really serious about the deal, it would not take too long for the deal to see the light of day. Among the various suitors, Reliance is the only potential buyer that expressed interest in buying into Future Retail apart from taking a stake in other group companies. That could be the differentiator.

Deal adds value to Reliance

For the Reliance group, the acquisition of Future Retail offers any easy access to a vast retail franchise. For example, RIL has 11,784 stores spread across 29 million square feet. The Future Retail deal will help Reliance add another 1500 stores with a combined area of 16 mn square feet across 437 cities. With the kind of trouble that Future group finds itself in today, RIL may be in a position to get hold of the retail franchise at an extremely attractive valuation. That will surely add value to its retail plans.

reliance vast footprint if it would get more heft with future lifestyle
Image Credit: Livemint

Freedom from Debt woes

A big advantage for Biyani stems from the fact that cash-rich RIL saves him from the Rs.12,700 crore debt pile. Biyani family already has pledged its entire stake to banks for funding and it makes their position more vulnerable after the price crash. Cash infusion from a healthy balance sheet like RIL will be timely bail out for the Future group.

Going Digital

JIO mart
Image: Jio’s digital business

The biggest takeaway for Future group in terms of operational efficiencies could be the digital platform that Reliance Retail will provide. Currently, it does not have the resources to invest in deep digital technologies to take on the likes of Amazon and Wal-Mart. A deal with Reliance at this stage also makes the group future proof. That could be a bigger advantage for Future group as compared to the immediate benefit of debt reduction.

The Great Indian retail battle

future group with reliance group

The talks involving Future Group are part of the intensifying war to win over the Indian shopper — both online and in physical stores. Amazon has already pledged to invest $5.5 billion in the country, while Walmart Inc. spent $16 billion to buy local e-commerce leader Flipkart Online Services Pvt. in 2018.

Since Facebook’s investment in late April, Reliance has aggressively raised funds from a slew of private equity firms for Jio Platforms, a vehicle Ambani is using to pivot his empire away from its legacy oil-and-petrochemicals business. Shares of Future Retail Ltd (FRL) have risen 52% so far this month. One reason for this optimism is that reports suggest Reliance Industries Ltd is one among the suitors for assets held by the Future Group, including stakes in FRL and Future Lifestyle Fashions Ltd.

Additionally, although there is huge potential for e-commerce in India, a pure-play e-commerce model is not sustainable for the long term due to high fulfilment costs and customer acquisition costs. Thus, while digital presence is important to keep up with changing consumer preferences, the importance of offline presence cannot be ignored. Of course, the deal value will be crucial, and investors will have to wait and see which of Future Group’s companies RIL eventually ends up buying.