Shares of Future Group companies had risen sharply shortly after Reliance Retail Ventures Ltd (RRVL) said it will acquire the former’s retail and wholesale and logistics and warehousing businesses in late August. RRVL is a subsidiary of Reliance Industries Ltd (RIL).
High leverage and the impact of the covid-19 pandemic had taken a terrible toll on Future Group’s fortune and RIL’s bailout act was initially a sigh of relief for minority investors. However, they soon realized that the deal did not have much value and the shares of the Future group companies have corrected significantly in the range of 38-55%.
“On the one hand, there was not much for minority shareholders, since the value of the transaction was enough to pay the debt. It was basically an emergency sale, “said Himanshu Nayyar, analyst at Yes Securities Ltd.” Second, there was always a fear that the arbitration and settlement would go smoothly, which has now materialized with Amazon obtaining a favorable verdict in Singapore. to put the deal on hold, “Nayyar added.
In this context, the interim relief that Amazon obtained in a Singaporean arbitration court to suspend the RIL-Future deal potentially makes matters worse for minority investors. In the worst case, Future Group’s value will decline as the case drags on, and shares in group companies may experience further downward pressure.
Govind Shrikhande, former managing director of Shoppers Stop Ltd and a veteran of the retail industry, says: “This is a complicated situation given that the rules of foreign direct investment (FDI) in multi-brand retail are not completely clear.” the question of whether India’s rules of jurisdiction would be more relevant in this case.
According to Shrikhande, there are four broad possibilities for how this is likely to play out. “First, RIL would complete a deal by quickly tracking the permits. Second, the deal goes through, but is delayed for a few weeks or months and Future has to pay a fine to Amazon. “Third, Amazon gets a favorable decision to stop the deal and establishes a new deal. This would obviously face multi-brand FDI.” Fourth, the deal suffers an unprecedented delay and both Amazon and Reliance lose interest, destroying the value of Future Retail, “said Shrikhande.
“The decision will likely delay RIL’s plans to expand its retail presence in India,” says Sweta Patodia, Analyst, Corporate Finance Group, Moody’s Investors Service.
RIL shares closed 4% lower on Monday. Reliance Retail is already the largest retailer in the country, although the deal was expected to accelerate its growth plans. In a report on August 31, CLSA analysts had said: “This acquisition further consolidates Reliance’s position as the largest retailer in India by expanding its retail outlets by 15% and retail area and sales. storage area by more than 80%. This will also add 4.1% to Reliance’s market share in organized retail and bring it to 17.8%. “
In short, the current fight is causing shareholder value erosion; They will undoubtedly expect a quicker and relatively more shareholder-friendly solution.
.
