Shares of Future Group companies had risen sharply soon after Reliance Retail Ventures Ltd (RRVL) said it will acquire the former’s retail & wholesale and logistics & warehousing businesses in August-end. RRVL is a subsidiary of Reliance Industries Ltd (RIL).
High leverage and the impact of the covid-19 pandemic had taken a terrible toll of Future Group’s fortunes and RIL’s rescue act was initially a sigh of relief for minority investors. However, they soon realised the deal didn’t hold much value, and stocks of Future group firms have corrected meaningfully in the range of 38-55%.
“For one, there was nothing much for minority equity shareholders, as the deal value was just about sufficient to pay off the debt. Basically, it was a distress sale,” said Himanshu Nayyar, analyst at Yes Securities Ltd. “Secondly, there was always a fear of the arbitration and the deal actually going through smoothly, which has now materialised with Amazon getting a favorable verdict in Singapore to put the deal on hold,” Nayyar added.
In this backdrop, the interim relief Amazon got in a Singapore arbitration court to put the RIL-Future deal on hold makes things potentially worse for minority investors. In a worst case scenario, Future Group’s value will decline as the case drags, and stocks of group firms can see further downward pressure.
Govind Shrikhande, former managing director of Shoppers Stop Ltd and a veteran of the retail industry says, “This is a complicated situation given that the Foreign Direct Investment (FDI) rules in multi-brand retail are not fully clear.” Moreover, there is the issue of whether the Indian jurisdiction rules would be more relevant in this case.
According to Shrikhande, there are four broad possibilities in how this is likely to play out. “First, a deal would be completed by RIL by fast tracking the permissions. Second, the deal happens but is delayed for a few weeks/months & Future has to pay a penalty to Amazon.” Third, Amazon wins a favourable decision to stop the deal and anchors a new deal. This would obviously face multi-brand FDI hurdles. “Fourth, the deal gets into an unprecedented delay and both Amazon and Reliance lose interest thereby destroying Future Retail’s value,” said Shrikhande.
“The decision will likely delay RIL’s plans to expand its retail footprint in India,” says Sweta Patodia, Analyst, Corporate Finance Group, Moody’s Investors Service.
RIL’s shares closed 4% lower on Monday. Reliance Retail is already the country’s largest retailer, although the deal was expected to fast track its growth plans. In a report on 31 August, CLSA analysts had said, “This acquisition further cements Reliance’s position as India’s largest retailer by expanding its retail outlets by 15% and retail footprint and warehousing area by over 80%. This will also add 4.1% to Reliance’s market share of organised retail and take it to 17.8%.”
In sum, the current fracas is resulting in value erosion for shareholders; they will undoubtedly be hoping for a quick solution and one that is relatively more shareholder-friendly.