Strategic Considerations: Future Group's deal advisor EY held conference calls with investors denying that there will be changes to the pending INR 247bn (USD 3.36bn at today's exchange rate) asset-sale deal signed with Reliance Industries Limited. The advisor reached out to Future Group stakeholders, including holders of Future Retail's USD 500m 5.6% bond due 2025, and informed them that Reliance has not considered renegotiating the deal terms and that any changes would "complicate" the transaction already mired in litigation. The Securities and Exchange Board of India (SEBI) regulations restrict the ability to make any changes to the deal once submitted for regulatory approval, according to REDD analysis. However, the scheme of arrangement for the proposed slump sale of Future Group assets to Reliance provides flexibility to adjust consideration based on certain performance and valuation parameters.
- SEBI reviewed the deal agreement and approved it with caveats
- Amazon.com, an indirect minority shareholder in key subsidiary Future Retail, has litigated against the deal in international arbitration and in India's courts
Future Group deal advisor EY held conference calls with investors denying that there will be any changes to the pending INR 247bn (USD 3.36bn at today's exchange rate) asset-sale deal signed with Reliance Industries Limited (RIL), three sources who attended the calls said.
EY informed investors, including holders of Future Retail Limited’s (FRL) USD 500m 5.6% bonds due 2025, that Reliance has not considered renegotiating deal terms and that any changes would “complicate” the transaction already mired in litigation, the sources said.
The denial comes after a local news report earlier this month said RIL's retail units were considering renegotiating the terms of the deal to buy Future Group assets as the second wave of Covid-19 affecting India would hurt the retail business, as reported. The deal was expected to close on 31 March 2021, as per the scheme of arrangement, but given legal delays, the deadline was moved to 30 September 2021, as reported.
FRL's 2025 bonds traded off on the report and were indicated at 70.5 bid Thursday, after trading over 10 points higher in early May, according to ICE Data Services.
Draft Scheme Wiggle Room
The draft scheme provides RIL's units Reliance Retail Venture Limited (RRVL) and Reliance Retail Fashion Lifestyle Limited (RRFLL) with general powers to make modifications and amendments to the scheme, in addition to certain specific provisions permitting changes to the consideration amount.
In the event of a reduction in the overall number of store leases between 31 March 2020 and the effective date of deal, due to the cancellation of existing leases, there would be a reduction from the lump sum consideration for “Retail & Wholesale Undertaking”.
Given the lease and rental agreements of several Future Group stores, including Big Bazaar and fbb (Fashion at Big Bazaar), have reportedly been transferred to RRVL and other retail companies in some key locations in metro cities and Tier-II cities in India, the final consideration could be renegotiated, the first source said.
A reduction in price for grocery stores would be determined by revenue generated by these stores in FY20 and an EBITDA margin of at least 7%, while a reduction in the price of fashion and apparel stores (including fbb) would be determined by revenue generated by them in FY20 and EBITDA margin of at least 12%.
FRL reported a 71% YoY drop in revenue to INR 15.06bn (USD 205.8m) in 3Q21, while Future Lifestyle Fashions Limited (FLFL) reported a 45% YoY decline in revenue to INR 9.50bn (USD 129.7m) for the quarter ended 31 December 2020. For the same quarter, FRL's EBITDA fell 116% YoY and turned negative to INR -1.13bn (USD -15.4m) and FLFL reported an 86% YoY drop in EBITDA to INR 460m (USD 6.28m).
The scheme also mentions there could be a reduction in the consideration for "Logistics and Warehousing Undertaking", in the event of a fall in warehousing spaces, physical assets, trade receivables and other assets between 31 March 2020 and the effective date.
Reliance units will carry out physical inspections of fixed assets, inventories, trade receivables, loans and advances, and other assets 15 days before closing the deal to determine the realizable value of these assets, according to the scheme, deducting any shortfall versus the values determined in March 2020 from the overall consideration.
The INR 247bn (USD 3.36bn) deal announced on 29 August 2020 entails the acquisition of Future Group’s retail, wholesale, logistics and warehousing assets by RRVL and its RRFLL subsidiary, as reported.
SEBI restrictions
The Securities and Exchange Board of India (SEBI) circulars restrict the ability of the parties to make changes or include terms not part of the draft scheme submitted to the regulator for its approval and demand that no changes can be made without its specific written consent. The only changes permitted without consent are those mandated by regulators, tribunals or other such authorities.
Both parties can apply to SEBI again if they wish to change certain terms. However, the approval granted to the deal in January this year carried certain unique conditions pertaining to the outcome of the ongoing Amazon-Future dispute, as reported. Amazon.com, an indirect minority shareholder in FRL, has litigated against the deal in international arbitration and in India's courts, claiming violation of a shareholder agreement. In India, the litigation is presently pending before the Supreme Court, which will hear the matter on 27 June, as reported.
In the event Reliance and Future apply for SEBI's consent to make changes to the scheme, they will have to wait for the regulator to grant its consent. They can either continue with the deal or Reliance could withdraw, a power available to it under the draft scheme.