The Future-Reliance Deal Is Dead. Long Live The Deal.

India Inc. would do well to remember—when playing at the Ambani deal table an old rule prevails, the house always wins.

This past week was another reminder of the perils of going up against the might, money and maneuvering of Mukesh Ambani-led Reliance Industries.

Because even though its Rs 27,513-crore deal with Future Group failed, Reliance emerged a winner.

It’s got most of what it wanted—close to 1,000 Future stores under its control. At cost, without any of the incumbent debt. And rival Amazon tied up in more knots than any litigation can quickly unravel. Bonus: The deal announcement helped boost valuation for its $6.4 billion equity raise in 2020.

In its heyday, group flagship Future Retail had launched a discount day that runs even now—Sabse Sasta Din.

Who’d have thought the best bargain would go to India's richest man.

What Happened?

In short: Too much debt, a fire sale to a giant competitor, a spurned old suitor, litigation, delays, a lifeline turned noose and a deal on its last breath. Finally killed by shortsighted creditors.

Some of the blame for the failed deal lies with Future Group founder Kishore Biyani—for first entering a relationship with Amazon and then committing to Reliance. When elephants fight, it is the grass that suffers.

But, the decision by Future Group’s secured creditors to vote against the deal, is more perplexing.

Banks: Message Or Miscalculation

Banks voted against the deal reportedly for reasons ranging from lack of clarity on final consideration, to preferential treatment to bondholders. Maybe they also wanted to send Ambani a message—that the surreptitious takeover of stores is not acceptable.

In any other circumstances, it would have been a powerful message and a rare one. Over a dozen banks, public and private, voting against a deal with the country’s most powerful businessman.

But now that vote is akin to closing the barn door after the horses, or at least half of them, have escaped.

There was a time value to the Future-Reliance transaction. Sure, Biyani built good assets and brands over the past decade, but Ambani is building an equivalent every year. For instance, before the pandemic, Future Group had some 2,000 retail stores. Between April and December 2021, Reliance Retail added 1,750 stores to reach a total of 14,412. Assuming a thousand of those are erstwhile Future stores, Reliance Retail will yet organically achieve in a few quarters what the Future deal would have given it.

Some of that time value was killed by the Amazon litigation. The rest the banks have decided to fritter away by pushing the resolution out further.

After a failed debt restructuring, then a failed deal and half the stores gone, banks now seem to be betting on the insolvency process for the flagship Future Retail.

Maybe they are hoping Reliance will come back for the remaining half. Or other retailers will show interest.

That will depend on:

→ How many stores Future Group can keep operational, which may need more funding;

→ Whether the banks can club all the Future Group retail, wholesale, logistics, warehousing assets under insolvency, like was done in the Future- Reliance scheme;

→ Whether they intend to enforce their security for the stores lost—by pursuing Reliance for stock, shelves and fixtures.

→ The time taken to do achieve all this.

An insolvency process will push out the Biyanis. It will also leave Amazon out in the cold. Narrowing the competitive field for Reliance.

Banks might have stood a better and quicker chance at business and loan recovery had they voted in favour of the deal and appealed to Reliance’s better instincts to honour as much of the original transaction as possible. The ugly public relations fallout that always accompanies PSU bank haircuts may have offered some soft leverage.

Now banks have none. And they have yet to explain how they slept through the transfer of leases of almost a 1,000 stores underlying their security.

Kishore Biyani: Raj Kapoor To Guru Dutt

Why did Future not disclose publicly that Reliance, a rival till the deal was done, had come to control over half its store network, was paying rent and supplying inventory? It’s a question Kishore Biyani and his team, too, need to answer.

Were they being naive or allowing a takeover-by-stealth to overcome the delays caused by Amazon litigation?

Banks, desperate to save face, will need a fall guy. Reliance Retail has a solid defence—it prioritised the interest of its stakeholders. That makes Biyani the only target.

None of the potential outcomes bode well for the man who pioneered big box retail in India. Yet, Biyani is no stranger to existential crises.

A decade ago, this journalist asked him how his business was riding out the global financial crisis. He said, “Earlier I was like Raj Kapoor, a dreamer, now I’m like Guru Dutt, a realist.”

Menaka Doshi is Managing Editor at BloombergQuint.