Future group is in a debt spiral, absence of online platform and COVID 19 is only exacerbating the situation as the sales have been at a record low levels.

 Kishore Biyani is the face of retail in India, how you ask? Due to his vision of aggressive expansion, he wanted to have a store in every 2km radius and to transform this vision into reality he started borrowing aggressively, he did not become the king of retail by playing it safe. The real question is how did the Retail king lose his throne?  With the pandemic impacting the retail businesses adversely the debt started burdening business. The business has consolidated debt of Rs. 12,989 crores as of 31^st March 2019 and after repeatedly defaulting on repayments, Kishore Biyani was pushed into a corner. The aggressive expansion at the cost of financial stability worked adversely against Kishore Biyani who has now cracked a deal with reliance. Since the news came out around August 2020 and the stock prices of future group inched towards the upper circuit but in recent past the stocks have remained range bound. But what is the deal of Future group and Reliance? The Mukesh Ambani owned Reliance, announced in August 2020 that the subsidiary Reliance Retail Ventures Limited (RRVL) will acquire the logistics and warehousing business and Reliance retail and fashion lifestyle limited will acquire retail and wholesale business of Future Group for a total consideration of Rs 24,713crore on a slump sale basis. Slump sale is basically sale on a lump sum basis without valuing individual assets and liabilities of all the entities.

These 5 listed subsidiaries of future groups are going to get merged into one entity, that is the Future Enterprise and the swap ratios for the same have been decided, if we work on these swap ratios the average return from each of this deal is coming out to be 30%. But what is Swap ratio?
Swap ratio is exchange of shares of one company for that of another, kind of like barter system where one good is exchanged for another but in this case, one company’s shares are being exchanged for another’s.

Below is the swap ratio table:

So for example, if you hold 10 shares of a Future supply chain after the merger of a future supply chain into a future enterprise you will get 131 shares of the latter. Future supply is trading at Rs. 86.35 and Future Enterprise is trading at Rs. 9.30 as on 30^th October 2020. If you hold shares of future supply worth Rs.863 (Rs. 86.35 *10 shares) you will get 131 shares of future enterprise which is worth Rs.1218.3 (Rs.9.30 * 131) a profit of Rs.355.3 and when we calculate the swap ratio of all the entities together, we get an average return of 30%.  Similar margins are  available for other groups as well.

But is the return of 30% too good to be true? Well, like any other deal there are few risks involved in this deal as well the first being the record date has not yet been decided and the Amazon litigation stating that Future Group has breached an agreement is not likely to expedite the whole process. Amazon has filed a complaint to Singapore international arbitration centre and they have stalled the deal of Future group with Reliance temporarily and not only this, Amazon has taken a step further and filed a complaint to SEBI now to look over the matter if this litigation doesn’t get solved Reliance may backout from the deal, also the regulations revolving around the merger of these 5 entities into one and then takeover by Reliance is a painstakingly slow process. Whole set of regulations are to be followed shareholders approvals is to be needed. 30% sure is an attractive investment return, but will this return actually get realised is the real question.

So, what should you really do? Buy, Sell or Hold the shares?
Future group is a high debt company, there has been de-growth in profits and revenue due to decline in sales. Operating profits have also been hit, there is liquidity issue and they are facing stiff competition from e- commerce platforms because of COVID-19. When we talk about the financial position the company it is not doing very well, they defaulted on their interest obligations of 151.4 million rupees on two of its local-currency notes which had led the rating agencies to downgrade the companies rating, but if we were to believe in the age-old axiom, with higher risk comes higher profit, and wait for the reliance deal to succeed we can see an upside potential of 30% but if and only if we are willing to take that sort of risk. 

(Disclaimer: All writer’s opinion is their own and do not constitute financial advice in any way. We recommend you perform your own independent research or speak with a qualified investment professional before making any financial decision.)