Consolidation: Key details you must know about the Future, Bharti Retail merger

Soon after retail giant Walmart and Bharti parted ways in 2013, Kishore Biyani,the CEO of Future Group sensed an opportunity to join forces with Sunil Mittal if he wanted to scale up. And almost two years later, the two companies have sealed the deal with Future Retail  acquiring most of Bharti Enterprises’ shares in its retail business to create one of India’s biggest retail chains with more than 570 stores across the country with revenues of over Rs 15,000 crore. This is the second major consolidation exercise within two days in the fast-growing Indian retail sector, after Aditya Birla Group announced on Sunday that it is merging all its apparel retail businesses into a single entity. The two-tier deal between Future and Bharti groups also involves merger of their respective retail infrastructure business into Future Retail – creating two separate companies for the front-end retail and infrastructure activities. Future will acquire a majority stake in the merged entity, with Bharti holding around 14 to 15 percent in  the two entities - Future Retail and Future Enterprises— which will be listed. Here are five key details you need to know about this merger: 1.Deal terms  Under the all-stock deal valued at about Rs 750 crore ($118 million),  Future Group, the parent of Future Retail, will hold 46-47 percent and Bharti Retail will own roughly 10 percent stake in each of the two firms. Loss-making Bharti Retail will also hold securities that can be converted into shares worth about 5 percent each of the two new companies, which would be listed on the stock exchanges. So Bharti Retail will get shares worth Rs 500 crore immediately, while shares worth another Rs 250 crore would be converted at a later date. As part of the deal, Bharti Retail will issue one equity share of Rs 2 each for every share of Rs 2 held in Future Retail. The merger is likely to be completed in six to eight months, with permissions to be secured from Competition Commission of India (CCI), Securities & Exchange Board of India (Sebi), and stock exchanges. An integration panel with eight members is monitoring the modalities. 2.  No overlap, both will run their respective brands: The combined entity will have over 570 retail stores in 243 cities with operational retail space of over 18.5 million square feet. It will operate 203 Big Bazaar and ‘easyday’ hypermarkets , 197 Food Bazaar and ‘easyday’ supermarkets, and 171 other stores comprising of Home Town, eZone, FBB and Foodhall. Addressing a press conference on Monday afternoon, Biyani said they plan to open 4,000 smaller format stores by 2021, up from the total of about 570 stores now. Biyani further said that  all new small format stores in North India will be opened under Easyday brand. In South and West India, stores will be opened under Nilgiri and KB’s brand.

3. Board structure:  Also, Bharti will have one member on each of the two new companies. A report in the Business Standard said that in the combined board, with eight members, Rajan Mittal, vice chairman and managing director of Bharti Enterprises, is the only one invited to represent Bharti, thereby indicating the extent of the group’s direct involvement. However, a committee has been formed to look at the final structure of the board.

[caption id=“attachment_555722” align=“alignleft” width=“380”]  Reuters[/caption] 4. Restructuring of debt: Although Bharti Retail has zero debts, the new combined retail entity will have Rs 1,200 crore debt, while the combined infrastructure company will have Rs 3,500 crore debt. What this means is that Future Group has restructured its debt in such a  that  it will shift Rs 3,500 crore of Future Retail’s Rs 4,700-crore debt to Future Enterprises, leaving the flagship retailing arm with  Rs 1,200-crore debt .

5.More deals in the offing between Biyani and Mittal?   According to a report in Economic Times, the transaction could pave the way for other deals between the two groups such as Biyani leveraging Bharti’s telecommunication network and Airtel getting a retail footprint in Future Group besides possible synergies in payment gateways and mobile wallets. “Future Group in particular may not have the financial resources to invest in the growth of the business. And Bharti may have the resources but may not have the desire to do so on their own,” said Arvind Singhal, chief of consultancy Technopak. “Supermarkets and the hypermarkets space is a very very exciting space to be in…yet it is very frustrating because it needs a lot of investment.” Monday’s deal came almost eight years after Bharti had entered a pact with America’s Walmart to do retail business together in India in August 2007. The deal also comes against the backdrop of rising competition in the retail sector, with online retailers, who have raised billions of dollars from private investors, wooing shoppers with bargains and deals that brick-and-mortar rivals cannot match. This has left some traditional retailers vulnerable to being overtaken by better-funded online rivals in a country where a rapidly expanding middle class is turning to the web. “E-commerce could be a catalyst for people who are getting out of retail to say that: we are anyway under pressure now this e-commerce thing is also happening,” said Harminder Sahni, managing director at consultants Wazir Advisors. “It’s probably going to get worse. So let’s get out of it and hand it over to some partner and let them run it.” With inputs from Reuters