Reliance- Future Group deal announced!

• Reliance Industries has announced that it will buy Future Group's retail business across apparel, lifestyle and grocery segment, for ₹24,713 crore
• After this transaction, Future Enterprises will retain the manufacturing and distribution of FMCG goods and integrated fashion sourcing and manufacturing business and its insurance JVs with Generali and JVs with NTC Mills

Contours of the deal

The deal is structured in 3 parts.

Part 1- Consolidation of businesses: Listed entities of Future Group i.e., Future Retail Ltd., Future Lifestyle Fashions Ltd., Future Consumer Ltd., Future Supply Chain Solutions Ltd, Future Market Networks Ltd. will merge into Future Enterprises (FEL).

Part 2- Slump Sale: 'Future Enterprises will sell the retail and wholesale business that includes key formats such as Big Bazaar, fbb, Foodhall, Easyday, Nilgiris, Central and Brand Factory to Reliance Retail by way of a slump sale. The total value of the slump sale will be Rs 24,713 crore.'When a business is sold for a lump sum consideration without values assigned to individual assets and liabilities, it is called a slump sale.

Part 3:  An additional investment by Reliance Retail totalling to ₹2,800 as follows:

• Reliance Retail and Fashion Lifestyle will invest Rs 1,200 crore in a preferential issue of shares by FEL for a 6.09% stake. 
• It will also invest Rs 400 crore towards FEL warrants. On conversion, the investment will amount to Rs 1,600 crore and result in an additional stake of 7.05%

Benefits for Reliance Retail from the deal

• Reliance Retail is the fastest-growing retailer in the world. In the last five years, the revenues in the retail business have grown 8 times and profits have multiplied 11 times.
• Reliance Retail had reported a consolidated turnover of ₹162,936 crore and net profit of ₹5,448 crore for the year ended March 31, 2020. The table below shows how much the different segments contribute to Reliance Retail

• As seen from the table above, Grocery and Fashion and Lifestyle make-up less than 30% of the overall revenues for Reliance Retail. This deal will give Reliance Retail access to a network of nearly 1,800 stores across India. 
• Currently, the Consumer Electronics Business accounts for nearly 75% of Reliance Retail’s overall store count and generates 27% of the revenues at Rs 45,000 crore. This deal with Future Retail will provide a big boost to the Grocery business, which has been in focus after the recent deal with Whatsapp
• ‘Grocery, which contributed to about ₹35,000 cr in FY20, has emerged as a very important segment under Reliance Retail. With this acquisition, Reliance Retail will become the largest grocery player in the country with close to Rs 65,000 crore of business.’Reliance Retail and WhatsApp have announced creating a JioMart platform using WhatsApp and to support small businesses on WhatsApp.
• Fashion and lifestyle contributed to 8% of overall sales at Rs 13,500 crore for Reliance Retail. Future Lifestyle manages about 400 stores across formats such as Central, Brand Factory and nearly three dozen apparel brands such as Lee Cooper, Clarks and Indigo Nation

Benefits for Future Retail

• The main rationale behind the deal for Future Group is to pare its overall debt. The value of Rs 24,713 crore includes Rs 12,000 crore debt of Future group. After the deal, FEL will have surplus cash of around Rs 3,000- 4,000 crore, according to media estimates
• Future group will consolidate the retailing businesses across six Future group companies FEL, Future Retail, Future Lifestyle Fashions, Future Consumer, Future Supply Chain and Future Market Networks. FEL will do the slump sale after the consolidation.
• Post this exercise, FEL will emerge strong with businesses in manufacturing and distribution of FMCG products and integrated fashion sourcing and merchandising. These businesses will further benefit from supply agreement with Reliance Retail. This deal will also enable FEL to focus on the creation of new-age brands in the FMCG and fashion space and expand its reach.
• The transaction will help FEL to expand with a focussed business model and a stronger balance sheet.

INDmoney Analysis

• In the last few years, Reliance Industries has shifted its focus away from Oil & Refinery towards its Consumer Businesses. The Consumer Business (which includes Reliance Retail, Reliance Jio and Media & Entertainment) now account for more than 35% of the overall Consolidated EBITDA.
• As it stands today, the future growth and the roadmap of the company is oriented towards its consumer businesses (Reliance Retail, Jio and Jio Platforms). These high growth areas have driven the valuations in the stock and will continue to do so.

Consensus recommendation on Reliance Industries: Buy (Based on view of 33 analysts from external research institutions)