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Breakingviews

Breakingviews - Reliance ties golden bow onto its shopping deal

A worker cleans the floor in front of a hoarding of Reliance Industries Ltd, controlled by Mukesh Ambani, one of India's richest men, at a shopping mall on the outskirts of Kolkata, India, September 7, 2016. Picture taken September 7, 2016. REUTERS/Rupak De Chowdhuri

MUMBAI (Reuters Breakingviews) - Mukesh Ambani is wrapping up a deal to buy a brick-and-mortar shopping rival with a golden bow. A unit of his Reliance Industries conglomerate has agreed to buy the retail, wholesale and supply chain businesses from Kishore Biyani’s Future Group. It’s a fiddly but clever acquisition that girds for online battle with Amazon and Walmart-owned Flipkart.

As a first step in the transaction, Biyani will consolidate his sprawling assets, including Big Bazaar supermarkets and modern warehousing, into the Mumbai-listed Future Enterprises. That company is swapping shares to absorb five related listed companies. It also will swallow up more than a dozen mostly smaller and unlisted firms. Once that’s done, Future Enterprises plans to sell the retail assets to Reliance for an enterprise value of $3.4 billion.

The terms of the Future share swaps are, in one way, generous for shareholders of the affiliates. Owners of Future Retail, the largest of them by market value, are receiving a 50% premium, based on Friday’s closing price. That figure shrinks significantly to just 19%, however, when adjusted to the closing price on June 17, the day before reports of a deal surfaced in local media.

Amazon and others that had backed Biyani’s retail ambitions will end up owning something else entirely. Future Enterprises will be left with a hodgepodge of assets, including an insurance joint venture with Generali, some fast-moving consumer goods units and manufacturing facilities.

Several factors will help Ambani get through checkout. Plenty of investors probably would prefer to avoid any standoff. Private equity firm L Catterton, for example, picked up 10% of Future Lifestyle Fashions in 2018 and this year bought a $260 million stake in Reliance’s digital business, Jio Platforms. Meanwhile, Future Group’s debt problems mean stock prices may have kept falling without a sale.

Ambani has added a flourish, too. Reliance is staking a claim to the Future Enterprises rump by immediately buying equity and warrants that amount to a 13% stake and impute a $2.7 billion valuation based on the equity portion. Reliance’s backing of the company at the centre of the share swaps could signal further interest down the line, which should further lift the premiums. It’s too early to determine the financial logic of the entire deal but the strategic rationale is solid. Reliance has meticulously planned its shopping list.

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