Reliance Takes Over Future Group; So What is the Big Deal?

Last Updated: 9th July 2020 - 03:30 am

The deal between Reliance Retail Ventures (a unit of Reliance Industries) and the Future Group finally happened on the 28th of August. It looked like an inevitable marriage. The only retail company that had a massive expansion plan and could absorb the breadth of the Future group was Reliance. The Future group was desperate for a stronger balance sheet to prevent a default that would have resulted in its rating being downgraded. It is in this background that the Rs.24,713 crore deal was finally inked in August.

Anatomy of the Reliance – Future Group deal

As part of the deal, Reliance Retail Ventures will acquire the retail, wholesale, logistics and warehousing business of the Future group via slump sale. That means; the individual assets and liabilities of the Future Group will not be valued but an overall valuation is worked out. This would logically imply that there will be no open offer made to the minority shareholders of the Future group. Here is how the chronology of the deal will look like.

Step 1	Five of the Future group companies will be merged into Future Enterprises Ltd (FEL) based on predetermined Swap Ratio
Step 2	Future Enterprises will hive off all retail assets into a single unit and sell it to Reliance Retail in the form of slump sale
Step 3	The logistics and warehousing units of the Future Group will be transferred separately to Reliance Retail
Step 4	Reliance Retail will infuse Rs.13,000 crore to clear the Future group debt and another Rs.7,000 crore towards operational liabilities
Step 5	Reliance Retail will pay another Rs.6000 crore towards the promoter stake in the Future Group
Step 6	Post the deal, Reliance Retail will invest Rs.1200 crore into FEL for a 6.09% stake, valuing the post merger entity at Rs.20,000 crore
Step 7	Reliance Retail will invest another Rs.1600 crore for 7.05% stake in FEL in two tranches via warrants; taking its total stake in FEL to 13.14%

Data Source: Scheme of Arrangement

After the deal, RRVL will own the retail, wholesale, logistics and warehousing business of the Future group. The Biyani Family will be left with the FMCG business, the manufacturing franchise, integrated fashion sourcing and the insurance JV with Generali.

How the Future group companies will be first merged into FEL?

A total of 19 companies will be merged into a single entity before the assets are transferred to Reliance Retail. However, 14 out of these 19 companies are already wholly owned subsidiaries of FEL and no action would be required. The other five companies will be merged into FEL as the first step in the swap ratio as laid out in the table below. On conclusion of the merger, the 5 listed companies will cease to exist and subsume into FEL.

Company Merged into FEL	Swap Ratio for the shareholders	Implied Price in the merger deal	Premium / Discount to CMP (*)
Future Consumer	9 shares of FEL for every 10 shares held	Rs18.00	+57%
Future Lifestyle	116 shares of FEL for every 10 shares held	Rs232.00	+60%
Future Retail	101 shares of FEL for 10 shares held	Rs202.00	+49%
Future Supply Chain	131 shares of FEL for 10 shares held	Rs262.00	+74%
Future Market Networks	18 shares of FEL for 10 shares held	Rs36.00	+35%
() – Refers to closing price on 28 August 2020*

Data Source: Company Filings

If you glance at the indicative price at which the merger has happened, all companies got a premium ranging from 35% to 74% of their pre-deal price. In short; the deal has been value accretive for the shareholders of these companies.

What is in the deal for the Future Group and the Biyani Family?

Will the Biyani Family lose control of the Future Group? They most certainly will! In fact, all their core businesses in retail, wholesale, logistics and warehousing will have to be ceded to the Reliance group. The Biyani family will only retain the manufacturing and FMCG business, integrated fashion sourcing and the insurance JV. The group has been in talks to hive off the insurance JV also to raise funds.

For the Future group, it avoids the embarrassment of another default. In July, the Future Group had come close to defaulting on dollar bonds and in September, Rivaaz Trading, part of the Future Group defaulted on payments. It needs to be noted that Reliance Retail will take on the entire Rs.12,500 crore debt of the Future Group and also its operational liabilities of Rs.7000 crore. That will keep the brand safe and the core business sustains.

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