Reliance Almost Doubles Retail Footprint with Acquisition of Future Group

Reliance Industries Ltd’s acquisition of debt-strapped Future Group will almost double the footprint of its retail business, which now is valued at up to USD 68 billion, analysts said. The oil-to-telecom conglomerate on Saturday announced the acquisition of Future’s retail, wholesale, logistics and warehousing units for Rs 24,713 crore. The deal terms entail a merger of five listed units of Future Group into Future Enterprises Ltd (FEL).

Reliance Retail has also proposed to invest Rs 1,200 crore in FEL preferential equity (6.09 per cent of post-merger equity of FEL) and Rs 1,600 crore in preferential warrants (option to acquire further 7.05 per cent). The deal increases the retail store footprint of Reliance Retail Ltd, a unit of RIL, from current 28.7 million square feet to 52.5 million sq ft, consolidating its pole position, analysts said.

While UBS said the deal would require approvals from SEBI, CCI and NCLT in addition to no objection from creditors and minority shareholders, JP Morgan said it remains to be seen if Reliance would look to re-brand the existing Future group stores under own formats. The deal brings potential synergies from the increased geographic presence, improving sourcing efficiencies and cost rationalisation, UBS said raising its valuation of Reliance Retail from USD 64 billion to USD 68 billion.

HSBC said the acquisition implies a clean acquisition of Future Retail, Future Lifestyle Fashions Ltd (FLFL) and Future Supply Chain Solutions Ltd (FSCSL). In addition, it will acquire a 13.1 per cent shareholding in the remaining of FEL. “The deal will allow Reliance Retail to almost double its retail area under operation and increase the store count by 15 per cent,” it said.

Goldman Sachs said the proposed transaction could solidify Reliance Retail’s market leader positioning in organised retail across categories, bolster warehousing and logistics enabling faster growth for its online offering JioMart and improve competitive positioning versus foreign retailers like Walmart and Amazon. Motilal Oswal said the deal holds very high strategic interest to RIL as it would aid in enhancing footprint, offer a good legacy franchise and help build competitive strength.

Credit Suisse said EBITDA per square feet of the acquired portfolio is less than one-third of that of Reliance Retail and Avenue Supermarts. “This is due to both lower revenue per sq ft and higher cost structure (both rent and employee cost). In our view, the synergies are higher on the revenue front,” it said.

Further synergies should come from a higher scale with benefits from saving in procurement, logistics and supply chain costs. Also, the deal will lower delivery cost and reduce delivery timelines for JioMart as a result of deeper presence through Future Retail’s neighbourhood store network of Heritage Fresh (in South India) and EasyDay Club (in North India).

“Both should help to improve the competitive positioning of RIL’s online and offline retail segments,” it added. Nomura said after Reliance Retail, Future group’s retail business is the largest offline organised retail business in India.

“It is particularly strong in the grocery and fashion/lifestyle segments, has a pan-India presence, and has outlets at strategic locations,” it said. Due to high leverage and the impact of COVID-19 impact, the Future Group has faced challenges.

“A financially strong Reliance could significantly turn around operations and grow sales volumes and improve profitability, in our view. “Also, we expect the combination with Reliance’s existing retail advantage to bring synergy and scale advantages,” it said.

Axis Capital said besides network expansion, there were tremendous benefits in operating synergies/scale efficiencies, supply-chain integration, and acceleration in JioMart rollout (through Future’s expertise in last-mile delivery/logistics plus the potential conversion of a large network of small store/convenience format as JioMart fulfilment centres. It valued Reliance Retail at Rs 3.6 lakh crore, up from Rs 3.5 lakh crore.

Kotak said the proposed acquisition will boost Reliance’s retail footprint to 13,540 outlets from its existing base 11,806 outlets reported as on June 30, 2020. FRL reported footprint stands at 16.1 mn sq feet across a network of 1,388 outlets including 290 Big Bazaar stores (large format grocery) and 990 Easyday, Heritage Fresh and Nilgiri stores (small format grocery).

FLFL has a presence of 7.7 mn sq ft across 348 outlets. “We believe FRL’s formats can provide a significant boost to Reliance Retail’s food and grocery (F&G) business segment,” it said. “Further, Easyday, which is a small kirana-like neighborhood store format, can also potentially boost Jiomart’s fulfilment capability in the cities that it is present in.” FRL operates store formats such as Big Bazaar (hypermarket), FBB (value fashion), Easyday (local grocery store) and Foodhall (premium food and grocery).

FLFL is an apparel retailer and operates the Central (premium apparel large format store) and Brand Factory (apparel discount retailer) formats. Besides, FLFL also has partnerships with foreign brands and operates certain standalone stores (EBOs) for these brands (some of these brands include Clarks, Celio). It had a network of 348 stores (including EBOs) as of March 2020 and retail trading area of 7.7 mn sq ft.

JP Morgan said Future Group in the past had highlighted multiple partnerships with Amazon India which were being scaled up, and “there is no mention of what would happen to those partnerships”. “Retail larger and more dominant, strategic investors could have to pay a higher premium to buy into Reliance Retail,” it said.

It valued Reliance Retail at USD 65 billion with online grocery delivery business JioMart accounting for USD 20 billion and the remaining being value for the physical retail. “Given the multiple steps of FEL acquiring the listed subsidiaries of the Future Group and then the slump sale, we believe the entire transaction could easily take a year to complete,” it added.

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