by Aakash Athawasya
India’s biggest business tycoons, Tata, Reliance, and Aditya Birla are set to battle for dominance in one of the world’s most under-penetrated, and fastest-growing markets - Indian retail. They will be joined, in partnership and opposition, by e-commerce giants Flipkart and Amazon, which have been acquiring and preventing acquisitions left, right, and center.
Over the past few months, domestic retail saw a wave of developments, setting the stage for a new industry battlefield. After roping in Facebook and Google as investors in JioMart, Reliance’s bid to tie together the disenfranchised kirana stores in the country, Reliance began building its retail prowess. Reliance Retail Ventures (RRVL), the retail subsidiary under Reliance Industries announced the acquisition of Future Group, the company best known for the Big Bazaar supermarket chain. However, Jeff Bezos’ Amazon halted the deal. Flipkart, the other e-commerce behemoth, consolidated its wholesale and retail business with two stellar acquisitions, one of which Amazon was after as well.
The retail-trinity is set to be complete with Tata Group’s reported acquisition of a major e-grocery company. This acquisition would set up Tata to build its highly-touted and all-inclusive ‘super-app’ to push through its retail hope, and challenge the likes of Reliance, Amazon, and Flipkart.
Needless to say, every big name has thrown its hat in the retail industry, which only till a few months ago, was shuttered under COVID-19 and the ensuing lockdown. Now, Indian retail is shaping up to be the biggest frontier, where it’s winner take all, and where the competitors are among the richest in the world.
Kirana king
The retail-race was initiated by Reliance, with its January 2020 launch of JioMart. Building on the concept of kirana stores, JioMart connects small-scale retailers with customers through a mobile app. The app also connects the retailers to Reliance’s wholesaler network. The Mukesh Ambani-led conglomerate’s aim is to leverage Jio’s already healthy user base and integrate it into a retail-consumption channel through JioMart.
Even as the pandemic stopped retail cold, Reliance continued to push its JioMart ambitions. In April, social-media giant Facebook announced a $5.7 billion (Rs. 42,370.9 crores) investment in Jio Platforms for a 9.9% stake, making it the largest minority shareholder. Facebook’s investment and its communication giant WhatsApp, the most popular messaging application in India, would work with JioMart to connect businesses and consumers, as per reports.
The crux of this partnership between Facebook and Reliance was to empower the small retail business in India, as a statement by the social media company read,
“Our goal is to enable new opportunities for businesses of all sizes, but especially for the more than 60 million small businesses across India.”
Following on from the Facebook investment, Reliance roped in investors like Google, Intel, Qualcomm Asia Pacific, the sovereign wealth fund of Saudi Arabia, and Abu Dhabi among others. In total, Reliance sold a 32.9% stake in Jio Platforms for Rs. 1.5 lakh crores, with Facebook taking the biggest slice of the pie.
Reliance JioMART investment and stakeholders
With JioMart, Reliance would be building its online presence and connecting the small-scale retailers at that. However, with only 1.6% of India’s total retail sales being online, Reliance needed to strengthen its presence in the offline world, and beyond just household items. For that Reliance picked a prime and debt-ridden target to build its future retail ambitions.
Fight to the debt
The biggest acquisition of the aforementioned trio is Reliance snapping up Future Retail, not just for the size of the valuation, but the Kishore Biyani-owned company’s debt burden, Amazon patronage, and now Amazon blockade.
In August 2019, Amazon acquired a 49% stake in Future Coupons, a promoter group of Future Retail, for Rs. 1,500 crores. An exchange filing stated,
“Pursuant to these agreements, Amazon has agreed to make an equity investment in Future Coupons Limited for acquiring a 49% stake comprising both, voting and non-voting shares.”
At the time, Future Coupons owned a 7.3% stake in Future Retail, reports stated that Amazon would receive a 3.5% stake in the retail company which would later be acquired by Reliance Industries.
The motive of the Amazon-deal for Future Enterprises? Primarily the same as the motive for the Reliance-deal, debt management. Future Retail had racked up Rs. 3,000 crore in debt when the Amazon offer came, and this was before COVID-19 and the lockdown stopped retail traffic.
Nine months later, as India’s economy began opening-up step by step, Reliance made a giant leap in its retail ambitions. On August 29, Reliance Retail Ventures announced the acquisition of Future Enterprises’ retail business for a whopping Rs. 24,713 crores ($3.6 billion), giving the Ambani-owned company a 13.1% stake in Future Enterprises. This meant Reliance Industries would hold the keys to popular budget-retail brands like Big Bazaar, FBB, Nilgiris, Easyday, Central, and BrandFactory.
In addition to taking over the reins of these retail outlets, Reliance would take over Rs. 12,500 crores in debt owed by Future Enterprises. The conglomerate owes this sum to a consortium of domestic banks, including Axis Bank, with an exposure of Rs. 1,250 crores, Bank of Baroda, at Rs. 750 crores, and ICICI Bank and Bank of India, at Rs. 5,750 crores collectively. As of March 2019, Future Retail’s gross debt amounted to over Rs. 2,600 crores.
With the might of Future Retail under its belt, Reliance began building partnerships. In the months of September and October, between its Future deal and the Amazon halt, Reliance secured a Rs. 32,200 crore investment in 7 different deals, selling a collective 7.3% stake in its retail subsidiary from investment partners all over the world. This put Reliance Retail Ventures’ pre-money equity value at Rs. 4.8 lakh crore.
Reliance Retail Ventures investment and stakeholders
Reliance Retail Ventures also notched up its own acquisitions. On August 19, the retail subsidiary acquired a majority equity stake in Vitalic, the parent company of Netmeds, an online pharmacy company. The deal was worth Rs. 620 crores with Reliance receiving a 60% stake. This acquisition comes on the back of reports that Reliance is also eyeing up investments in online furniture retailer Urban Ladder, and e-grocery company Milkbasket, which is expected to launch its IPO next year.
With Netmeds, and potentially Urban Ladder and Milkbasket, Future Retail, and its heavily invested JioMart, Reliance is building a full suite of offerings from e-commerce to offline retail and levering its telecommunications prowess at that.
Two-horse race
As Reliance was selling equity in its subsidiaries to manage the Future-debt it undertook, Amazon was considering its legal options. In October, two months after the deal between Reliance and Future retail was penned, Amazon approached the Singapore International Arbitration Centre (SIAC) intending to halt the acquisition. The American e-commerce giant alleged that the deal violated a 2019 agreement and it’s against the interest of Future Retail’s shareholders. A source close to Amazon said,
“This deal between Future Group and Reliance Retail is anti-shareholder because none of the shareholders will get anything as Reliance has technically bought assets of Future Enterprise, the holding company.”
Included in the 2019 deal was a non-compete clause, which listed 30 restricted parties in which Future Retail or Future Group could not enter into a share sale agreement. Reliance Industries was one of the 30 restricted parties. Amazon leveled three points in opposition to the Future-Reliance deal, the violation of the non-compete clause, Future’s alliance with Reliance despite the latter being in the restricted parties’ list, in addition to the former not seeking Amazon’s consent despite owing the 49% stake in Future Coupons, and finally, Amazon’s efforts to rope in investors to assist with Future Group’s debt management. Future Retail argued that its deal with Reliance was separate from Amazon’s deal with Future Coupons, stating that the two are different entities.
On October 26, SIAC provided interim relief to Amazon and halted the Reliance-Future deal. The order given by the single-judge bench of VK Rajah SC stated,
“The majority respondents have asserted that the ‘horse has bolted’ and that, consequently, the claimant no longer has any legitimate interests meriting protection. This is incorrect. The horse has not bolted, even though the respondents have opened the stable door. Even assuming that the ‘horse has bolted’, it is apparent that the respondents are contractually obliged to work with the claimant to cajole the ‘unruly horse’ to return to its stable.”
Here the ‘horse’ is Future Retail which is ‘unruly,’ in light of its subsequent deal with Reliance. Future Group, the respondents are obligated to work with Amazon, the claimants to bring it back to its stable.
Amazon then wrote to both the Bombay Stock Exchange (BSE) and markets regulator, the Securities and Exchange Board of India (SEBI) to enforce the relief provided by SIAC, and stop the Future-Reliance deal on domestic soil. Since the Singapore court’s decision is not enforceable in India, the e-commerce giant needs to receive a binding order of the same from an Indian court.
While Amazon and Reliance were playing a tug-of-war for Future Retail and the future of Indian’s retail industry, another domestic superstar was forging its entry.
This is Part 1 of the Great Indian Retail Battle story. You can read Part 2 here.