Future Retail: Synergy gains in HyperCity acquisition

Future gets premium retail chain; Shoppers Stop pares debt

The deal between Shoppers Stop and Future Retail is a win-win outcome for both sides as it helps the former bring down its debt and focus on the departmental store format while enabling the Future Group expand its presence at a reasonable cost. 
 

Manish Jain of Nomura believes there are a number of synergies between the two (Future Retail and HyperCity) given primary focus on food/grocery and fashion. 
 

About 40-65 per cent of merchandise for the two retailers falls in the grocery segment, while the proportion of fashion/apparel is in the 17-30 per cent range. Given the higher focus of both retailers on private labels in the food business, this should help boost margins of Future Retail going ahead and improve sourcing of products (Premium Harvest, Tasty Treat among others) from sister concern Future Consumer. Finally, with its asset-light strategy, Future Retail would be able to expand the footprint of HyperCity which the current management has been unable to do, says Jain of Nomura.

An analyst at a domestic brokerage says the company will get a premium portfolio of products at upmarket locations in larger cities as compared to Future Retail’s Big Bazaar and Easyday formats. 

The enterprise value (equity plus debt) of the deal would be around the Rs 1,000-crore mark, with the equity value pegged at around Rs 700 crore (including cash and issue of fresh shares). The enterprise value-to-sales comes to about one time, which analysts say is reasonable. Even if Future Retail were to take an additional debt of Rs 700 crore (HyperCity's debt of Rs 400 crore and cash), the overall debt for the company would increase from Rs 900 crore to Rs 1,600 crore. Given the equity of Rs 2,500 crore it would still be a manageable 0.6-0.7 times from the current 0.4 times. 

Analysts, however, believe the gains are much more for Shoppers Stop than Future Retail. By selling HyperCity, Shoppers Stop will exit a business with a debt of Rs 400 crore and making an annual loss of Rs 84 crore, giving it a much sharper focus on the departmental format. 

As far as Future Retail is concerned in terms of space, HyperCity will also bring about 1.4 million square feet of space to Future group’s 13 million square feet. Further, a Rs 1,100-crore addition to the turnover (in FY17) compared to Rs 17,000 crore in annual sales of Future Retail does not move the needle much, says an analyst. 

What it does, however, is like its earlier two acquisitions of Heritage and Easyday, expand its offerings and geographic spread in various categories without taking on too much debt. Also, given the small net loss came of Rs 84 crore, and Future Retail's expertise as well as synergies between the two companies, expect a faster turnaround in Hypercity's operations.