The Future is in good hands; but will the promoter buyout come later?

The troubled ‘King of Retail’ finally threw in the towel after the debt-ridden group narrowly averted a default as many of its stores had shut recently. The group is being restructured by Mukesh Ambani, who has now become the ‘King of everything he sets his eyes upon’, and bought Future Group for a consideration of around Rs 24,713 crore. Though the restructuring may take a few months to take shape, the control would shift immediately to Reliance Retail.

The restructuring involves the merger of all the listed Future Group entities into Future Enterprises Limited (FEL) at a valuation which gives a premium of around 55% to the merging companies taking the market captilisation from 14,278 crore as of Friday to around Rs 21,000 crore at the converted valuation. Even the fresh funds being infused by Reliance Retail into Future Enterprises is at a post money valuation of nearly Rs 18,500 crore.

However, with most of the lucrative businesses and brands moving out of the Future Group to Reliance Retail through a slump sale of Rs 5,628 crore, it needs to be seen whether the consolidated entity FEL can command the valuation based on its intrinsic worth or with the props provided by the Reliance Group. However, the bankers, who have a collective exposure of nearly Rs 9,500 crore should be among the gainers. The total debt on the balance sheet was around Rs 12,778 crore as of September 30, 2019, which would have gone further during the pandemic. FEL will continue to be the manufacturing and outsourcing division of Reliance Retail with investments in the insurance JV and the NTC mill JV.

As per available information, there is clarity on direct equity infusion of Rs 1,600 crore into FEL via preferential allotment and equity warrants for another 7.05% stake. There is a further cash flow to FEL of Rs 5,628 crore via slump sales. It needs to be seen how the balance Rs 17,485 crore is being pumped in by Reliance Retail to settle the creditors and lenders. The trade creditors seem to have been ‘instructed’ to take a 40% haircut on their outstanding. And a part of this would also flow to the promoters of Future Group to clean up their personal debt. There is also a possibility of some of the creditors and lenders converting part their dues into equity, thus further expanding the equity capital. The only intriguing aspect in the whole deal is the low equity participation of Reliance Retail at around 7.05% of FEL despite pumping in nearly Rs 24,713 crore. With the promoter group holding at a sub-50%, will the promoter buy-out come later?

Mukesh Ambani, despite being a later starter in the Retail Business, is today the undisputed emperor. This acquisition has sealed every possible window of inorganic opportunity for the competition. Most of us may have ‘arm chair’ suggestions on how Kishore Biyani could have averted this unfortunate situation, however, he may, someday pen his memoirs on what went wrong and what he could have done differently had the clock turned back. Having been the path breaker, the man who introduced modern retail in India, in the format we are accustomed to, will always remain the ‘King of Retail’ albeit without the Kingdom.

Ambareesh Baliga is an independent market expert. Views are his own.