RIL-Future Group deal: RIL shares rally over 2.5%; Future Group stocks jump

Shares of Reliance Industries (RIL) rallied as much as 2.6 per cent to Rs 2,172 apiece on the BSE on Monday after the company announced its arm, Reliance Retail Ventures Limited (RRVL), will acquire the entire retail, wholesale, logistics, and warehousing businesses from the Future Group as a going concern basis for a total consideration of Rs 24,713 crore. 

At 09:30 AM, the stock was trading over 1 per cent higher at Rs 2,139.20 on the BSE against Friday's close of Rs 2115.60. In comparison, the benchmark S&P BSE Sensex was trading over 1 per cent higher at 39,879.39 levels. 

Shares of RIL had hit an all-time high of Rs 2,198.70 on July 27, 2020. 

Meanwhile, shares of Future Group stocks, too, were trading with healthy gains. For instance, Future Enterprises was frozen at 5 per cent upper circuit limit of Rs 21.20 while Future Consumer was at Rs 12.05, up 5 per cent. Future Lifestyle Fashions, too, hit a 5 per cent  upper circuit limit of Rs 152.35. Future Retail was trading at Rs 161.30 - 20 per cent upper circuit.

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

In a statement, RIL said the acquisition is being done as part of the merger scheme in which Future Group is merging certain companies carrying on the retail businesses into Future Enterprises Limited (FEL). As per the plan, various Future group companies such as Future Retail Limited, Future Consumers Limited, will first merge into Future Enterprises Limited. READ MORE
 

Subsequently, the retail and wholesale undertaking will be transferred to Reliance Retail and Fashion Lifestyle Limited (RRFLL), a wholly-owned subsidiary of RRVL. At the same time, the logistics and warehousing undertaking will be transferred to RVVL. 

What brokerages say

CLSA, the global brokerage firm, has maintained an "outperform" rating on the stock post the deal with the target price of Rs 2,250.  The acquisition of Future Group business is value accretive with big market share gains, the brokerage notes. "This acquisition further cements the company's position as India's largest retailer. The deal will add 4.1 per cent to the market share of its organised retail and take it to 17.8 per cent, CLSA added. 

Analysts at Prabhudas Lilladher say that the acquisition will enable Reliance to strengthen its backend and retail footprint to scale up its Jio Mart business meaningfully. 

"Future Group shareholders will get shares in FEL (Future Enterprises), however, we believe that huge equity dilution (12.26bn shares) post scheme of arrangement will result in significant pressure on the stock price given that FEL had just Rs4.3bn EBIDTA in FY20 (post arrangement basis)," wrote Amnish Aggarwal, Head - Research at the brokerage firm, in a co-authored note with Charmi Mehta and Heet Vora.  

Adding, "Our target price on Reliance post factoring in expected gains from this acquisition increase from Rs 2,170 to Rs 2,234 (SOTP based)."

The brokerage retains a "BUY" rating on the stock. 

"Although we don’t rule out near term uptick in Future Group stocks given a huge discount to prevailing FEL price, we recommend sell on rallies/ switch to RIL from Future Group companies," Prabhudas Lilladher said in a note issued on August 30. 

Edelweiss Securities, on the other hand, says the acquisition of the Future Group by RIL is highly synergistic; however, it shall require significant restructuring. 

Given RIL’s mammoth size with retailing at nearly 10 per cent of FY21E EBITDA, "we reckon Future Group would add less than 2 per cent to RIL’s consolidated EBITDA. Reiterate ‘HOLD’ on RIL with a target price of Rs 2,105," the brokerage said.