Future acquires Bharti Retail

Biyani's Future Group will acquire Bharti Retail in an all-stock deal, valuing the latter Rs.500 crore in equity after adjusting for accumulated losses of Rs.1,800 crore of the virtually debt-free Delhi-based retailer. The Mittals will get an immediate stake of 9% each in the BSE-listed Future Retail as well as in the yet-to-be-created entity of Biyani and a board seat in Future Retail. Bharti Enterprises will also receive Rs.250 crore worth of milestone-linked convertible debentures that can be converted into equity in future, eventually taking Mittal's stake in both the entities to about 15%. The transaction, the largest consolidation in India's retail segment, will create an entity that may outpace Reliance Retail as the country's largest brick-and-mortar retail company .
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, analysts said. Both companies can take advantage of their existing businesses to possibly rival the linkages that Reliance Industries Ltd could build between retail and the telecom network that the country's largest company is setting up under Reliance Jio, they said.
Parallel to the deal, Biyani is also restructuring his flagship retail business by creating two separate entities. Future Retail will have the front-end stores such as Big Bazaar, Food Bazaar, Home Town, eZone and other retail chains that will be clubbed together with Bharti Retail's Easyday chain. The other unit ­ to be named Future Enterprises Ltd -will house Future's back-end assets and investments as well as back-end infrastructure of Bharti Retail. While Future Retail is already listed, Future Enterprises will be listed at some time in the future.
As part of the restructuring, Biyani will also shift Rs.3,500 crore of Rs.4,700-crore debt to Future Enterprises, leaving the flagship retailing arm with a more comfortable Rs.1,200 crore debt on its books.
With the latest deal, Future Retail will enhance its footprint with more than 200 Easyday stores in 144 cities. Biyani's company currently doesn't have a presence in 77 of those cities. In November, Future Group acquired Chennai-based supermarket chain Nilgiris in all-cash transaction for about Rs.300 crore, giving Biyani a much-needed presence in the southern states. The Bharti deal will help Biyani open up in new areas including Punjab, Haryana and western Uttar Pradesh.
“Consolidation is the way forward and everybody has to build scale so we are joining hands to build scale,“ Biyani said in an interview. “This is the merger of minds (rather) than body and soul.“
He denied that the merger was in reaction to the rapid growth of online retail.

Biyani said a chance meeting with Mittal in The Chambers at the Taj some weeks ago led to the merger discussion, which culminated in a deal. Manoj Kohli, managing director of Bharti Enterprises and a company veteran, will oversee the integration for the Mittals. PwC was the transaction advisor and Edelweiss Financial Services was the independent valuer.
Biyani said the acquisition will further boost his grand omni-channel plans as Future tries to leverage its panIndia network of physical stores to deliver goods to consumers' doorsteps.
While Biyani said sales per square foot at Bharti-run Easyday stores is high, a retail sector veteran who has worked at Future Group in a top position said margins are narrower for grocery-heavy shelves. “You need a margin of above 20% to be viable and Bharti's small stores are doing only about 13%. But things could change for the larger stores as Biyani will bring higher-margin products, including apparel and fashion products,“ he said.
With annual sales of Rs.14,000 crore, Future Group is the country's second-largest retailer after Reliance and operates 17 million square feet of retail space. Reliance Retail overtook Future Group in terms of revenue last year. Future Retail, which houses Big Bazaar, posted a total income of Rs.7,569 crore with a net profit of Rs.64 crore for the nine months ended December. This includes revenue from consumer durables and home retailing.