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Mitsubishi surprises Biyani, wants stake in flagship Big Bazaar

After sale to Birlas, Future to close 4 deals by month-end

Arijit Barman  |  Mumbai 

Japan’s Mitsubishi Corporation has sprung a surprise on Kishore Biyani by asking for a piece of Big Bazaar, Future Group’s flagship retail business. Sources familiar with the development said the Japanese giant had made it a pre-condition to invest in Future Group’s food sourcing and back-end infrastructure.

The two sides discussed the issue in the US last week and the Japanese company even suggested a convertible structure that would allow an equity exposure in Big Bazaar, as and when foreign direct investment was allowed in multi-brand retailing. Currently, both Big Bazaar hypermarkets and Food Bazaar supermarkets are within Future Value Retail, Pantaloon’s wholly owned arm.

Big Bazaar is a Rs 8,000-crore high-growth business and Biyani wants to grow it further into a Rs 20,000-crore giant, before exploring strategic monetising options. Sources say Biyani is more keen on a strategic retailer like Walmart for his crown jewel when regulations permit.

ROUTE TO VALUE CREATION
Proceeds from transactions (before June 2012)
Pantaloons deal Rs 1,600 cr 
Sale of Future Capital  Rs 600 cr
Transfer of Future Capital debt Rs 3,600 cr 
Preferential allotment to BCCL Rs 200 cr
Future Staples put option Rs 200 cr
Total debt reduction Rs 6,200 cr
Considering some additional debt taken in FY‘12, expected debt by the end of June 2012 is around Rs 2,000 cr
CONSOLIDATED DEBT
(as of June 2011) Rs 7,800 cr
Other possible transactions in FY 13
Rs 1,000 cr
Sale of stake in insurance joint ventures
Rs 500 cr
Proceeds from new investors in Home Town & eZone
Rs 230 cr
Stake sale to new and existing investors in Future Supply Chain
Possible partnership in Central & Brand Factory

The $69.2-billion Japanese trading powerhouse typically makes financial investments across the world in different businesses aligned to its existing operations.

Biyani has been engaged with Mitsubishi and Lawson, Japan’s second largest convenience store chain and a part of the Mitsubishi conglomerate, for close to a year now for a strategic alliance. The structure would involve creating a new holding company where Future Group’s stakes in various sourcing and back-end operating would first get transferred; Mitsubishi would then pick up a significant stake, which could even be a controlling one.

Biyani was unavailable for comments and his spokesperson said the matter was speculative. Emails to Mitsubishi did not get any response.

Apart from the Aditya Birla Group, which agreed to pump in Rs 1,600 crore for a controlling stake in the Pantaloons fashion format, Biyani is in the middle of consummating five-six similar transactions with other strategic retailers, domestic conglomerates, PE funds and high net-worth individuals for the disparate pieces of his retail empire to reduce the group’s debt further. According to two people in the know, the Birla transaction has also led to preliminary feelers from at least two large business houses from India and West Asia for possible deals in Central and Brand Factory. With over Rs 2,100 crore in sales, these two are bigger than even the Pantaloons format.

“I am working on a single mission: to bring down the debt. The whole idea is to break up the business to consolidate and create value,” Biyani had told Business Standard after the Birla-Pantaloons deal announcement. “That way, I will be able to reach our goal of generating cash for growth and not get bogged down by interest payments,” he had said.

As of June 2011, the consolidated group debt in Future stood at Rs 7,800 crore. The flagship listed entity Pantaloon Retail and its wholly owned arm Future Value Retail, comprising the core retail operation, has Rs 4,200-crore leverage, while almost half or Rs 3,600 crore is with the non banking financial services arm Future Capital (FCH).

Analysts expect the company’s debt to have now gone up to around Rs 8,500 crore.

The streamlining by way of stake sales, disinvestments and alliances — at various stages of negotiation — needs to go through, if Biyani wants to achieve his plan of having a zero-debt company by 2013.

The FCH deal with Warburg Pincus — expected this month-end — will not only bring Rs 600 crore in cash but, more importantly, remove Rs 3,600-crore debt from Pantaloon Retail’s books.

Biyani is also expected to exercise his “put” option for the 36.5 per cent stake that Pantaloon holds in Staples Future Office Products, the office products JV he has with Staples Inc, the world’s largest office products company from the US. That would mean an additional Rs 200-crore inflow.

These four transactions are expected to bring down Pantaloon Retail’s debt to around Rs 1,600 crore, and save over Rs 700 crore annually in interest outgo.

But there is more to follow, including merging the 33-store eZone electronics retail chain with a Noida-based services company Intarvo and subsequently bringing in PE partners in the combined entity. Home Town, too, will see high net-worth individual investors and for the two Future Group insurance JVs, talks are on with two large domestic financial services groups. Biyani is also likely to rope in a set of new investors and allow his existing partner to nearly double stake in Future Supply Chain from the present 23 per cent.

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First Published: Thu, May 24 2012. 00:39 IST
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