August 30, 2020

HOW THE FUTURE SHAPES UP FOR RELIANCE RETAIL

By Roy

The Future of Reliance Retail is Bright. This post is all about the Reliance and Future Group deal and how it will make Reliance a major force in the Retail space.

In this post, I have mentioned that when Mr. Ambani sets his eye onto something, he tends to make a killing out of it. 4 years back he seemed optimistic with Jio and he shook up the well-established telecom industry with his Jio. This year I noticed the same optimism and aggression with his Retail business. I will try to analyse the deal from the perspective of Reliance.

Key Points of the deal:

  1. Reliance Retail will acquire Retail, Wholesale, Logistics and Warehousing business from Future Group.
  2. The entire acquisition will be done through a slum sale for Rs. 24,713 crore.

Slum-sale means, the assets are sold without assigning values to its different parts. It has been sold on a lumpsum valuation.

  1. Retail and Wholesale undertaking to be transferred to Reliance Retail & Fashion Lifestyle (RRFLL)
  2. Logistics and Warehousing undertaking will be transferred to Reliance Retail Ventures (RRVL).
  3. RRFLL will invest Rs. 1200 crore in preferential issue of equity shares of Future Enterprise Ltd (FEL).
  4. RRFLL will invest Rs. 400 crore in a preferential issue of equity warrants.

Equity warrants are instruments which will enable the holder to buy stocks at a predetermined price within a particular time period.

How the deal will pan out:

First, Future Group will merge its 5 listed entities to Future Enterprises Ltd (FEL). Five Companies are Future Consumer, Future Lifestyle, Future Retail, Future Market Network and Future Supply-chain. As per the decided swap ratio, the merger looks like this:

Company Last Traded Market Price Swap Values Premium/Discount
Future Retail 135.30 202.00 49.30%
Future Consumer 11.45 18.00 57.21%
Future Lifestyle 145.55 232.00 59.40%
Future Supply-chain 151.35 262.00 73.11%
Future Market Network 26.65 37.00 38.84%

Then Reliance will invest Rs. 1200 crore as upfront equity in FEL and then Rs. 400 crore will  be invested through equity warrants of FEL. This way, Reliance will take up 13.14% of the stake in FEL. Reliance will pay another Rs. 1200 crore at a later stage.

So, the gross investment looks like Rs. (24713+1200+400+1200) crore = Rs.27513 Crore.

Out of this amount, Rs. 13000 crore will be set aside to clear all the debts, Rs. 7000 crore for clearing liabilities (Premises rent, paying to vendors etc) and rest amount will be given to promoter group to pare the debts they have taken for the company on their personal capacity. More details of the deal are yet to emerge.

What it means to Reliance:

  1. Reliance Retail will have access to over 1800 stores of Future Groups namely, Bigbazar, FBB, Easyday, Central, Food Hall etc over 420 cities.
  2. Retail Business has two dominant aspects. One is apparel (Clothes, Fashion etc) and another is Food and Groceries. With FBB stores and Reliance’s current Trend stores, they will be able to scale it further. Ajio app will help them to get the digital footfalls. I Think, this segment will act like 1+1=3 model. Reliance will add on to their current market share.
  3. On the Foods and Groceries side, Reliance will come out as clear winner. Logistics, delivery and warehousing are the thorn in the flesh of a retail business. This logistics and warehousing eat away the margin in Retail business. Future coming under the Reliance fold, they will emerge out as the clear winner. Future logistics and warehousing channels are well established and it would take almost 2-3 years for Reliance to set up a delivery chain like this. They are getting the entire setup readymade and now can give Amazon a run for their money.
  4. This acquisition will give the necessary acceleration for growth to Reliance Retail arm. Now Reliance Retail has the visibility of growth and now they can take away the market share from other retail players.
  5. Organised Retail is still less than 10% of the overall retail market share. With Jiomart, Reliance will connect the kirana shops and become a behemoth in the retail space. Future Group will add 20% revenue for the Reliance Industries. This 1800 additional retail stores will bring in Rs 26,000 crore in additional sales that will help Reliance Industries control more than a third of India’s organised retail market.

Conclusion:

In my previous post, I mentioned that Reliance Retail is worth about Rs. 6 lakh core. The news is also gathering momentum that Mr. Ambani will look for new investors in his Retail business and after achieving a certain level of market value he will look to list the business in the stock exchange. We have to keep in mind that profit-making retail facing business demands the highest valuation multiples in the market and I have very little doubts that Reliance is on course to make their Retail wing, a customer-centric Retail Behemoth.