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Deleveraged: Understanding The Reliance Industries Future Group Deal

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In a move to pare debt, the Kishore Biyani promoted Future Group announced the sale of its retail, wholesale, logistics, and warehousing assets to Reliance Industries Ltd.’s retail arm Reliance Retail Ventures Ltd. as a slump sale. The entire deal, which not only includes the sale of above-mentioned assets but also funds infusion in Future Enterprises Ltd., is valued at ₹ 27,513 crore, according to Reliance Industries release on the exchanges.

The fund infusion and the sale of assets will take place after a reorganisation of publicly listed Future Group companies and a clutch of private companies owned by Future Group promoters.

Firstly, the listed entities of Future Group – Future Retail Ltd., Future Lifestyle Fashions Ltd., Future Consumer Ltd., Future Supply Chain Solutions Ltd., and Future Market Networks Ltd. – and 13 private companies will merge into Future Enterprises.

Post that, the retail, wholesale, logistics, and warehousing assets will be sold to Reliance Industries.

Lastly, RIL will infuse the funds.

The Merger

Futures Enterprises to issue:

9 shares to Future Consumer shareholders for every 10 shares held by them,

116 shares to Future Lifestyle shareholders of for every 10 shares held by them,

18 shares to Future Market shareholders for every 10 shares held by them,

101 shares to Future Retail shareholders for every 10 shares held by them, and

131 shares to Future Supply Chain shareholders for every 10 shares held by them.

Deleveraged: Understanding The Reliance Industries Future Group Deal

The Transfer

Future Enterprises will transfer retail, wholesale, logistics, and warehousing assets to RIL for cash of ₹ 5,653.55 crore. However, RIL will also be taking certain borrowings and current liabilities along with this. The value of these liabilities is expected to be around ₹ 19,000 crore.

The transfer of retail and wholesale business will include key formats such as Big Bazaar, fbb, Foodhall, Easyday, Nilgiris, Central, and Brand Factory.

Key info and stats for Future Retail

  • Big Bazaar is the flagship brand and is focused on value retail providing a wide range of products at reasonable prices. It is one of the largest hypermarket chains with 290 stores across 150 cities.
  • FBB or Fashion at Big Bazaar is the fashion brand. It has 95 standalone stores across 50 cities. It also operates an online platform fashion platform ‘fbbonline’.
  • Foodhall is a gourmet food chain and premium lifestyle food superstore. The stores have a range of home-grown brands of niche products and pantry staples. There are 9 stores in this format across 5 cities.
  • Neighbourhood store network: These include small-format grocery stores – Heritage Fresh store network in South India and Easyday in North India. It operates a membership program within these outlets for customers to obtain assured 10% discount across products. There are 892 such stores across 300 cities.
  • Brand Factory is India’s one of the largest chains of fashion discount stores that offers more than 200 Indian and International brands at 20%-70% discount. It operates 104 stores across 40+ cities.
  • Central is the flagship retail format under Future Lifestyle Fashion. It showcases over 500 brands across 25 fashion categories. There are 49 Central stores across 30 cities.

Deleveraged: Understanding The Reliance Industries Future Group Deal

Fund Infusion

RIL will invest ₹ 1,200 crore by subscribing to equity shares of Future Enterprises, post-merger, which will translate into a 6.1% stake. It will also invest ₹ 400 crore (25%) for subscribing convertible warrants. The entire value of warrants is ₹ 1600 crore and upon conversion, it will result in an additional stake of 7.1%.

The Debt Picture Of Future Group

According to the latest available financial data of listed Future Group companies, the total debt on their books was to the tune of ₹ 26,000 crore.

Deleveraged: Understanding The Reliance Industries Future Group Deal

According to Future Enterprises’ release, along with merging the five listed entities, the company will also merge 13 promoter group companies with itself. The share swap ratio for these private entities is not mentioned in the release. These 13 companies had a negative networth of ₹ 302 crore and sales of ₹ 279 crore in FY20. The total debt of these companies stood at close to ₹ 4,100 crore. The debt numbers are as of FY19 and have been compiled from credit rating agencies and MCA filings.

Deleveraged: Understanding The Reliance Industries Future Group Deal

Including the debt of these 13 unlisted promoter group companies, Future Enterprises’ debt post-merger would be close to ₹ 30,200 crore. After the sale of assets and fund infusion by RIL, the expected net debt would come down to ₹ 2,665 crore which is largely in line with the number given in Future Enterprises’ presentation. The company expects its net debt post receiving ₹ 2800 crore from RIL will come down to ₹ 2,315 crore.

Deleveraged: Understanding The Reliance Industries Future Group Deal

To service this debt, the company will be left with the FMCG, apparel, insurance, and joint venture with National Textile Corporation which will be valued at ₹ 19,704 crore. This value includes Future Enterprises’ 49.91% stake in the general insurance and 33% stake in the life insurance business.

Deleveraged: Understanding The Reliance Industries Future Group Deal

Considering the insurance business share at the operating level, in FY20, the EBITDA of this new entity would be close to ₹ 670 crore. After deducting interest, depreciation, and tax expense, the net profit would come down to ₹ 250 crore. This means that the company is valued at 78.5 times its earnings.

In the normal course, only the share of profit and/or loss of entities in which the company owns less than 51% stake is accounted for in the consolidated books. However, for calculation purposes, we have considered at the EBITDA level.

If we remove the value of the insurance company, then the valuation given to the FMCG and apparel businesses is very high. The price-to-earnings would be in the range of 133 to 216 times depending on the value assigned to the insurance business.

The FMCG and apparel business of Future Enterprises could benefit from its strategic supply agreement with RIL, which will not only allow them to sell their products in Reliance’s network of stores but also through its online platform – JioMart.

Deleveraged: Understanding The Reliance Industries Future Group Deal

If a retail investor is considering to buy shares of Future Consumer, Future Lifestyle, Future Market Networks, Future Retail and/or Future Supply Chain expecting an upside given the price arbitrage, he or she should also keep in mind the fact that the market would now start valuing the new avatar of Future Enterprises which is trading at an expensive valuation.

If the market gives a lower valuation to the new Future Enterprises, then the price arbitrage would disappear. Assuming ₹ 6,000 crore value for Future Enterprises stake in insurance businesses, the valuation of FMCG and apparel business stands at 188 times its FY20 earnings. Even if the market discounts the value of the new Future Enterprises by one-third, then the entire price arbitrage would vanish.

Deleveraged: Understanding The Reliance Industries Future Group Deal

This deal fails to address the debt lying on other promoter group entities. Two of promoter group entities – Central Departmental Stores Private Ltd. and Future Corporate Resources Pvt. Ltd. have a debt of over ₹ 9,000 crore. The extent of debt of other Future Group private entities is not publicly known. This might continue to remain an overhang on the share prices.

Also, the entire transaction of merging 19 companies into one, asset sale and fund infusion could take at least a year. And in this time, the debt on the books could increase not only for the listed entities but also for the private promoter group entities. This could lead to further value deterioration for the resultant entity, i.e., the new Future Enterprises.


This article is for informational purposes and should not be considered as a recommendation to buy or sell any stocks.