Amazon signs deal to buy stake in Future Retail

American e-commerce giant Amazon has signed a deal that would give it the option to take a significant stake in Future Retail Ltd, gaining access to physical stores across the world's fastest-growing retail market.

The deal would indirectly give Amazon a 3.58 per cent stake in Future Retail Ltd, which runs more than 2,000 stores, including budget department and grocery chain Big Bazaar, in 400 cities in the Asia's third-largest economy, the Indian firm said in a regulatory filing.

Future Retail said Amazon has agreed to buy a 49 per cent stake in Future Coupons Ltd.

Future Coupons owns a 7.3 per cent interest in Future Retail Ltd (FRL).

The agreement - subject to regulatory approval - gives Amazon the option to buy all or part of Future Coupons' shareholding in Future Retail. This, however, will not be exercisable until between three and ten years.

Future Retail did not disclose the terms of the deal.

It also gives Amazon the right of first refusal should Future Retail's founder, Kishore Biyani or his family decide to further trim the 47.02 per cent stake they hold in the company. This stake includes both direct and holding through entities such as Future Coupons.

The deal comes amid reports of Amazon being in late-stage talks to snap up to 10 per cent in India's third-largest merchandiser, whose founding family was seeking a valuation of about Rs 2,000 crore.

The agreement would help Amazon, which has already committed an investment of USD 5 billion into the Indian market along with a USD 500 million bet on the grocery segment, tap traditional walk-in consumer in the world's fastest-growing retail market, which is expected to be worth USD 1.2 trillion by 2021.

Earlier this week, it opened its largest campus globally in Hyderabad that can house 15,000 of its 62,000 employees in India.

India's retail market growth is a big jump from USD 795 billion in 2017, according to a report by Deloitte India and Retail Association of India.

Amazon is looking to raise presence in the country as it battles rival Walmart and richest Indian Mukesh Ambani, who is planning a hybrid e-commerce venture by coming online and offline retail formats.

Future Retail Ltd operates 2,000 stores in value and lifestyle segment through multiple retail formats such as Bigbazar, fbb and EasyDay Club.

When contacted, FRL declined to comment over the value of the deal, but said the investment would help the company launch new products and explore digital payment solutions.

"This investment reflects our commitment to innovate for Indian customers and offer best-in-class shopping experience. This investment provides an opportunity for us to learn global trends in digital payments solutions and launch new products," a Future Group spokesperson said.

In a regulatory filing on Thursday night, FRL had said it had been "informed by Mr. Kishore Biyani on behalf of the existing shareholders forming part of the promoter group and Future Coupons Ltd (promoters) that they have entered into a share subscription agreement and a shareholders' agreement with Amazon.Com NV Investment Holdings LLC (Amazon)".

It added that following these agreements, Amazon has agreed to make an equity investment in Future Coupons Ltd for acquiring a 49 per cent stake comprising both voting and non-voting shares.

As part of the agreement, Amazon has been granted a call option that allows Amazon to acquire all or part of the promoters' shareholding in FRL and is exercisable between the third and tenth years, in certain circumstances, subject to applicable law.

As on June 2019, the promoter group owned 47.02 per cent stake in FRL. Previous filings show that Future Coupons held about 7.3 per cent stake in Future Retail through 3.96 crore convertible warrants.

This is Amazon's third investment in the brick and mortar retail space in India, where it already operates an online marketplace. Amazon has previously picked up stake in retail chains - K Raheja Corp Group's Shoppers Stop and Aditya Birla Retail's More.

According to experts, this deal may allow Amazon to adopt a hybrid retail model in India, with FRL being the preferred partner for Amazon's grocery business, where e-commerce with physical retail infrastructure would together.

"Following this proposed transaction, we would expect Amazon to adopt the hybrid retail model in India, with FRL being the preferred partner for Amazon's grocery business, in our view," said Morgan Stanley in its report.

According to sources, Amazon and Future Group had been in discussions since last year. However, the discussions were put on hold after the Indian government tightened FDI rules for e-commerce marketplaces earlier this year. The discussions were re-started some weeks back.

The new regulations bar online marketplaces with foreign investments from selling products of the companies in which they hold stakes, and ban exclusive marketing arrangements. Also, the inventory of a vendor will be seen as controlled by the marketplace if over 25 per cent of the vendor's purchases are from the marketplace entity, including the latter's wholesale unit.