M&A Critique
Thomas Cook’s Sterling- Merger & Acquisition

Consolidating Future Retail

With rising disposable income of Indians, younger demography and fast-paced industrial development, Indian retail industry has emerged as one of the most dynamic sectors. The Indian retail industry accounts for 10% of our country’s gross domestic product (GDP) and around 8% of employment.

According to Boston Consulting Group’s report title Retail 2020: Retrospect, Reinvent, Rewrite India’s retail market is expected to nearly double to $1 trillion by 2020 from $600 billion in 2015, driven by income growth, urbanization and attitudinal changes.

A decade ago, modern retail or organized retail was the new trend which was catching up. At present, retail spending in the top-seven cities accounts for Rs 3.58 trillion, with organised retail penetration just at 19%. Online retail is fast catching up across the country because of huge discounts and convenience of shopping at a click of a button. In fact, and EY report says the online retail market is expected to grow from $6 billion to $70 billion during FY15 and FY20.

However, the going for organised retail has not been that easy and smooth. Companies had to cope with issues like inefficient supply networks, high rents, and increasing competition from well-funded e-commerce firms. After the Aditya Birla Group announced the merger of all its branded apparel businesses with Pantaloons Fashion and Retail Ltd, Future Retail & Bharti Retail announced their merger. There is some consolidation happening in the retail space as India is the fifth largest preferred retail destination in the world.

The Deal:

Future Retail & Bharti Retail

  • The retail entity, to be known as Future Retail Limited post demerger, will host the retail operations of both the entities.

The infrastructure entity, to be known as Future Enterprises Limited, post demerger will host the infrastructure, investments, and assets of both the companies.

  • Post consolidation, the shareholders of Bharti Retail and the shareholders of Future Retail, will be shareholders in each of the entities.
  • The consolidation and the demerger are subject to approvals of shareholders, the Hon’ble High Court of Bombay, the Competition Commission of India, the stock exchanges and other regulatory bodies.

Merger details and Holding pattern:

In consideration for the demerger of Retail Business Undertaking of FRL into BRL, BRL will issue 1 fully paid equity share of Rs 2 each of BRL to the equity shareholders/ DVR shareholders of FRL (on a fully diluted basis) as on the record date for every 1 fully paid up equity share / DVR of Rs 2 each of FRL.

In consideration for demerger of Retail Infrastructure Business Undertaking of BRL into FRL, FRL will issue 1 fully paid equity share of Rs 2 each of FRL to the equity shareholders of BRL as on the record date for every 1 fully paid up equity share of Rs 2 each of BRL.

Kishore Biyani and family will get around 47.8 per cent stake in the new Future Retail while Mittal family will own around 9.2 per cent stake. Rest will be held by public and institutional shareholders.

The existing holders of Optionally Convertible Debentures (OCDs) of BRL aggregating to 250 crores shall, consequent to the aforesaid demerger, hold OCDs in BRL and FRL aggregating to 250 crores. These OCDs would be convertible into equity shares of the respective companies, at the option of the company, at the price prescribed under SEBI (ICDR) Regulations, 2009 of preferential Issue of Securities as on the date of conversion.

The shareholders and OCD holders Of Bharti Group have agreed to share with the respective companies an upside of the realisation out of the shares of the two companies, subject to certain broad terms and conditions as follows –

  • If the sale proceeds are between Rs 950 crore and Rs 1,450 crore, the amount shall be 50% of the amount above Rs 950 crore.
  • If the sale proceeds are between Rs 1,450 crore and Rs 1,950 crore, the amount shall be 60% of the amount above Rs 1,450 crore.
  • If the sale proceeds are greater than Rs 1,950 crore, the amount shall be 75% of the amount above Rs 1,950 crore.

This shareholding pattern factors in warrants held by Biyani in Future Retail. However, it excludes the optionally convertible debentures (OCDs) held by unnamed investors in Bharti Retail.

About Future Group:

Future Group operates through three listed entities – Future Retail Limited, Future Lifestyle Fashions Limited and Future Consumer Enterprise Limited. Future Retail Limited operates Big Bazaar, Food Hall, fbb, eZone, HomeTown and Food Bazaar chains. It collectively operates around 350 stores spread over 11 million square feet of retail space in the country. The company also holds substantial stakes in various companies. Future Lifestyle Fashions Limited owns and markets over two dozen fashion brands through exclusive brand outlets, department stores, and multi-brand outlets, as well company-operated chains such as Central, Brand Factory and Planet Sports. It collectively operates around 400 stores spread over 5 million square feet of retail space. The company has also invested in a number of fast-growing domestic fashion brands and enterprises. Future Consumer Enterprises Limited focuses on the food and FMCG sector. It markets a number of FMCG brands including Tasty Treat, Sunkist, Sach, Premium Harvest and Fresh & Pure, operates India’s leading integrated food park at Tumkur, has an extensive agri produce sourcing network and operates around 400 convenience stores under the brands, KB’s, Nilgiris and Aadhaa. Collectively, Future Group operates around 17 million square feet of retail space in over 160 cities and towns across India and provides direct employment to over 40,000 people. Around 28 million Indians are part of Future Group’s Loyalty networks.

About Bharti Retail:

Bharti Retail is a wholly owned subsidiary of Bharti Enterprises. The company operates Easyday neighborhood stores and compact hypermarket stores called Easyday Market. Bharti Retail provides consumers a wide range of good quality products at affordable prices. Easyday stores are a one stop shop that caters to every family’s day-to-day needs. Merchandise at Easyday Market stores includes apparels, home furnishings, appliances, mobile phones, meat shop, general merchandise, fruits, and vegetables among others.

About Easyday and Easyday Market:

Bharti Retail Limited, is part of Bharti Enterprises, one of India’s leading business groups predominantly known for mobile phone services, owns and operates neighborhood stores called Easyday and compact hypermarket stores called Easyday Market. Easyday stores are one-stop shops that cater to every family’s day-to-day needs. They bring together a wide range of relevant goods, high-quality products and great in-store experience and service – all under one roof. Easyday stores range up to 2500 sq. ft and Easyday Market range up to 55,000 sq. ft. offering a variety of products displayed in a consumer-friendly manner that brings both entertainment and ease to the shopping trip.

What the deal means for both the companies:

Kishore Biyani has already streamlined Future Group’s entire business into three separately listed entities Future Retail, Future Consumer Enterprises Ltd and Future Lifestyle Fashion, an apparel retailing company.

Bharti Retail runs 216 hypermarkets, convenience stores and supermarkets under the Easyday brand.

After its partnership with Walmart ended in late 2013, the retail business has not really been a core business for the group.

So, while Bharti Group’s founder Sunil Mittal needed a strategic partner to take forward the retail business, Kishore Biyani, on the other hand, had been divesting non-core assets to focus on the key retail business after the group piled up debts.

Key Benefits from the Consolidation:

Consolidated Retail Operations Entity: (Post merger to be named as Future Retail) Benefits Coming in from the Consolidation:

  • Improvement in productivity, profitability and cost optimization through synergies in sourcing, logistics, shared services;
  • Stronger footprint in key markets in Delhi-National Capital Region, Haryana, western UP and Bangalore;
  • Larger network to distribute Future Group brands – in fashion and FMCG categories;
  • Common consumer strategies and lower marketing costs;
  • Richer consumer data as loyalty programs acquires a larger number of new consumers;
  • Better sourcing terms resulting from the consolidation of buying functions across all categories.

Benefits from Demerger:

  • Entity focuses purely on operating retail businesses and delivering higher shareholder value
  • Significant reduction in interest cost as overall debt will be around Rs 1000 crore.
  • The company no longer dependent on monetization of held­-for-­sale assets to lower debt.
  • Free cash flows positive from the first year itself with minimal incremental CapEx, resulting in higher Return of Capital Employed.

Consolidated Assets & Investments Entity: (Post-Merger to be named Future Enterprises) Benefits Coming from Demerger:

  • Gains from long-term contracts and business to business model with higher margin
  • Strong portfolio of profit making and asset rich entities like Future Generali Life & NonLife & NTC JV
  • Will benefit from timely monetization of some or all of these held­-for-­sale assets, including divestment of Future Supply Chain Solutions
  • Easier access to lower cost foreign funds / ECBs that will help lower cost of existing debt.

Comparison with the Reliance Retail:

With the two companies joining hands, they will not only be better positioned to take on Mukesh Ambani owned Reliance Retail and other e-commerce giants like Flipkart, Amazon, and Snapdeal.

Reliance Retail closed FY15 with 2,621 stores across 200 cities and revenues of Rs 17,640 crore. It added 930 stores last year alone.But Future-Bharti combine would have a wider footprint in terms of a number of cities as also bigger aggregate retail space (18.5million sqft against Reliance’s 12.5 million sqft).

“Bharti Retail’s strengths and network complement perfectly with that of Future Retail. It will bring close to millions of consumers and provide new opportunities for our supply partners. The operational efficiencies that can be derived from the merger will create significant value for o shareholders,” said Kishore Biyani.

Particulars Future + Bharti Reliance Retail
Retail Stores 570 2621
Retail space 18.5 M Sq. ft 12.5 M Sqft
Revenue *15,000 Cr 17,640 Cr.


Financials Contours:

“We are looking at close to Rs. 1200 crore of debt going as a working capital into the retail entity. The retail entity will raise a large business. Once we are making this into pure retail, the balance sheet will become very strong, it will be a very light balance sheet and all the focus is on return on capital employed on the smaller balance sheet which we are creating out of the retail business.

In terms of our infra business, it will have its own business of manufacturing, sourcing, it has multiple investments, and it has its infrastructure leasing business. So, they will get revenues out of that and they will service the debt and whenever we sell–off investments the loan comes down. So, what we are looking at is there is no increase in loans which will happen in both the companies as both the companies will run independently and balance sheets will become stronger of both the companies.”

Retail Market in India:

An IBEF report shows revenue generated from organised retail is projected to grow to $94.8 billion by 2019 from $ 15.5 billion in 2013. Supermarkets to grow to 8500 by 2016 from 500 in 2006. That’s the potential of the retail industry in India. increasing participation from foreign and private players will boost retail infrastructure.


The consolidation not only improves productivity and profitability due to synergies in sourcing, logistics and shared services but it also implies a stronger footprint in key markets. Consumers can now also expect more deals and discounts due to lower marketing costs.

The scale has become very critical for retail business. This is a  good merger. Bharti has a much larger presence in the North and Future Group may get much deeper inroads into the northern markets. Coming together of Future Retail and Easyday can give them a very strong pan India footprint which is matched only by Reliance Retail as of now. The potentials are far more synergetic in terms of logistics, supply chain management, and technology platform.


M & A Critique