There is no dearth of uncertainty on the fate of the Kishore Biyani-promoted Future Group. Caught in a mountain of debt, its flagship, Future Retail as also Future Lifestyle Fashions, among other group companies, face an uncertain future as the next stop appears to be the insolvency courts.
A deal struck in August 2020 had Reliance Retail agreeing to buy out the wholesale, retail and logistics businesses of Future Group in a `24,713-crore ($3.4-billion) deal. The beleaguered seller could not have asked for anything better since it allowed him to emerge from a deep hole. However, the hole only got deeper when, on April 22, as much as 69 per cent of the flagship Future Retail’s secured creditors rejected the deal.
The acquisition was already in the midst of a huge controversy as Seattle-based e-commerce giant, Amazon, objected to it. The company, in mid-2019, had acquired a 49 per cent stake in Future Coupons, an unlisted entity, giving it an indirect 4.81 per cent holding in Future Retail Limited (FRL), the entity that houses Big Bazaar, FBB, Easyday and Heritage. Given the restrictions on FDI in Indian retail, the deal with Future Coupons was expected to lead to control over FRL as and when regulations eased up. With Reliance now out of the picture at a critical juncture, how the story will play out is intriguing for several reasons.
Earlier this year, in a startling move, Reliance took charge of 835 stores across FRL’s formats. The background relates to Future’s difficult financial position, which had them struggling to pay rentals. At that point, about a year ago, Reliance sub-leased the stores to Future. Once Future began to slip up on rental payments, Reliance was entitled to terminate the sub-leases and take charge, which it did. Now, FRL is the core of Biyani’s business and to a large extent, determines its value on the bourses. Without its key asset—the retail stores—there is little that remains attractive to a potential investor in the company.
As the possession of FRL moves to the National Company Law Tribunal (NCLT), with the objective of initiating resolution proceedings under the Insolvency and Bankruptcy Code (IBC), the company’s future remains at best unknown. Shareholder wealth stands eroded as banks, too, do not know how much of the $4-billion debt will come back. Besides, the interest levels of Amazon remain a question mark with the most important stores at key strategic locations in the possession of Reliance, which already has a significant retail footprint across formats. The acquisition of FRL’s properties not only strengthens that but can effectively shut Amazon’s ambitions to be a big player in India’s traditional retail story—there is no player of FRL’s size looking to exit the business.
Insolvency Resolution Professional Vivek Parti points out: “With the secured creditors, primarily the public sector banks, having rejected the scheme of arrangement proposed by Reliance and with the key assets, being the retail stores, now with them, one-time settlement may have [an] issue of justification by the banks.” That really means going to the IBC seems like the only option. According to him, it is necessary for the banks to fight it out. “Else they will get nothing. Without the retail assets, very little is left of the Future Group barring the insurance business (the joint venture partner here is Italy’s Generali group) and small parts of logistics and manufacturing.”
There is little to no doubt that banks will get less than what they now expect to as the case moves to the IBC. Mahesh Singhi, Founder & MD, Singhi Advisors, an M&A advisory firm, thinks the lenders should have had a plan B.
“It does not seem like they did and that is not being very practical,” he says. He draws a comparison to a company like Ruchi Soya, which had a plant and also brand value. Retail, according to him, is a perishable service industry and that makes it very peculiar and also an extremely challenging business to run. “Your assets are your people and inventory. In this case, the staff has moved out and inventory has a shelf life. Besides, FRL does not own the property and is left with nothing more than the brand.”
To him, it is similar to the aviation industry where it is again a “perishable” service. “We have seen what has taken place with Jet and Kingfisher. The inventory with shelf life are the seats and once you lose that, nothing is really left,” says Singhi.
Even the most conservative estimate would suggest a resolution of any form is at least nine to 12 months away, which does not help the cause of the lenders. “It comes down to how much all this is valued at since banks will look to minimise the extent of damage. As things stand, the issue is untangling itself with a serious erosion of shareholder value and potentially little left for the banks,” says Parti. This is not to forget that shareholders are the lowest in the pecking order, much after the creditors. The saga of FRL is turning out to be more long-drawn-out than what one might have imagined. A resolution in any form is not visible. At least not for now.
@krishnagopalan
