Is Kishore Biyani close to selling Future Retail stake to Reliance?

Amid tough times for retail, the Future Group’s low share price could be an incentive

If latest reports are to be believed, Reliance Industries is likely in the front seat to acquire Future Retail If latest reports are to be believed, Reliance Industries is likely in the front seat to acquire Future Retail

Kishore Biyani has long been called the father of modern retail in India. It was Biyani’s vision that ushered in Big Bazaar, India’s first modern supermarket chain. However, amid rising debt and a deteriorating business environment due to the COVID-19 pandemic, Biyani is learnt to be in talks to sell a partial or complete stake in the flagship retail company Future Retail.

If latest reports are to be believed, Reliance Industries is likely in the front seat to acquire Future Retail. According to a report in a leading daily, Future Group will merge three companies—Future Retail, Future Lifestyle Fashions and Future Supply Chain Solutions—and the combined entity will then be acquired by Mukesh Ambani’s Reliance Industries, which recently announced it had become debt-free on a net level.

Future Group is reeling under rising debts and the situation was further aggravated by the COVID-19 pandemic, which led to the shut down of much of the retail industry, barring essential grocery and medicine shops, for over 60 days as the government announced a nationwide lockdown from March 24.

According to credit rating agency ICRA, the total debt at Future Group’s listed companies rose to Rs 12,778 crore as on September 30, 2019, from Rs 10,951 crore as on March 31, 2019.

As the financial condition worsened, the credit ratings of a few companies were downgraded, compounding matters.

In May, ICRA downgraded ratings on long-term loans and funds based facilities of Future Corporate Resources to junk because of a default by the company in the payment of a coupon due on April 30, 2020 related to the Principal Protected Market Linked Debenture Programme.

CARE Ratings revised its ratings on Future Retail’s long-term loans, long-term fund-based bank facilities, fixed deposit programme and non-convertible debenture issue to A- from A+, citing weakening business and financial risk profile due to the extended lockdown.

“The rating strengths are tempered due to increase in debt levels, significant decline in market capitalisation which along with high promoter pledge is expected to significantly impact financial flexibility, high working capital cycle, refinancing risk and the intense competition in retail industry,” it had said.

Since the beginning of 2020, Future Retail’s shares have plunged 62 per cent; Future Lifestyle Fashions and Future Supply Chain has slumped 63 per cent each. Between January-April, Future Consumer tumbled 75 per cent, before recovering, although its shares are still down 25 per cent from the beginning of this year.

The sharp fall in share price across the group companies as well as the deteriorating market conditions may have pushed Biyani towards finding a new investor in the group’s flagship firms and possibly reduce its debt, said a senior industry executive.

Future Retail’s business includes Big Bazaar, Nilgiris and Easyday supermarkets, Fbb apparel stores and eZone electronics stores, while Future Lifestyle runs department store chain Central and Brand Factory.

Over the years, Future Group also set up Future Consumer Enterprises, its FMCG company and dabbled in financial services, through insurance joint ventures with Generali.

Speaking at a retail industry summit in 2019, Biyani had said that the group may have expanded into too many categories.

“Earlier, we were into multiple categories. I think, we have done enough mistakes, we didn’t have that kind of bandwidth, we didn’t have that kind of resources then. We have done too many things, too early,” he had said then.

Now even as lockdowns are eased in states like Maharashtra, malls remain shut as cases continue to rise. Also, with social distancing being the norm and people curbing their spending even in states where markets have started opening up, a pickup in growth is likely to be slow.

“The consumers are likely to curtail their discretionary spending with reduced income as well as tendency to preserve cash. Also, more preference is likely towards online channels in order to avoid crowded spaces,” said CARE Ratings last month, revising its ratings on Future Lifestyle to A+ from AA- with a negative outlook.

Apart from Reliance Industries, Future Retail had earlier been linked with a possible stake sale to a few private equity firms and Amazon. The e-commerce giant had picked up a 49 per cent stake in Future Coupons, a promoter group entity, last year.

However, due to the various restrictions on FDI in multi-brand retail, it is RIL that may be in a better position to pickup Future’s retail business, say experts.

“The acquisition will have to be done locally, which Amazon will find it difficult, with multiple situations of multi-brand regulations and international funding. So, (a deal with) Reliance is the easier one,” said the senior industry executive.

Future Retail did not respond to clarifications sought over mail or phone. RIL also had yet to respond at the time of writing.

Reliance Retail is the largest retailer in the country operating 11,784 outlets. Reliance’s telecom arm Jio also recently launched JioMart, a digital platform that will connect neighbourhood grocery shops with consumers. Jio’s partnership with Facebook, which picked up 9.99 per cent stake in Jio Platforms, is also expected to be a big driver for Reliance Retail.

Jio Platforms raised Rs 115,693.95 crore through stake sales to Facebook and several private equity investors and sovereign wealth funds. This fund raising coupled with the Rs 53,124 crore raised through the rights issue helped RIL become debt free at the net level. This positions RIL strongly for increasing the penetration of its consumer businesses and new businesses like financial services, said Puneet Gulati and Saurabh Jain, analysts at HSBC Securities and Capital Markets.

“Post the deleveraging exercise, RIL’s balance sheet has immensely strengthened. With each of its businesses now capable of generating cash flows for themselves, we believe RIL will once again become a cash generating machine, thus allowing it to chart its next phase of growth,” said the HSBC analysts.

If RIL does acquire Future’s retail business, it will only help its strengthen its leadership position further.

On Tuesday, while Future Retail closed down 5 per cent to Rs 128.95, Future Lifestyle closed up 3.2 per cent to Rs 148.50.