Future Group shares sink after Reliance deal falls through

Shares of listed companies under the Future Group plunged as much as 20 per cent on Monday after Reliance Industries’ weekend announcement that a proposed deal with Future Retail cannot go through after secured creditors to the latter rejected the deal.

The group flagship Future Retail’s stock traded at the 5 per cent lower circuit limit at Rs 27.80. Future Lifestyle Fashions and Future Supply Chain Solutions also hit their lower circuit limit of 20 per cent and traded at Rs 29.40 and Rs 37.30 respectively.

Elsewhere, Future Enterprises hit the 10 per cent lower circuit limit at Rs 5.66, Future Consumer was down close to 19 per cent at Rs 3.96 and Future Market Networks fell 13.7 per cent to Rs 7.12.

Hit hard due to a slump in sales caused by the COVID-19 pandemic and the nationwide lockdowns, the Kishore Biyani-owned Future Retail entered into a deal with Mukesh Ambani’s Reliance Retail to sell its retail, wholesale and logistics business for Rs 24,713 crore in August 2020.

But, last week, secured creditors rejected the deal, with 69.29 per cent voting against it.

Getting approvals from regulators, shareholders, unsecured and secured creditors was crucial for the Future-Reliance deal to go through. The deal was crucial for Future Group as it would have helped it substantially pay off the debt and then concentrate on the businesses that it would be left with—essentially manufacturing and distribution of apparel and consumer products and a stake in insurance joint ventures.

But, Amazon objected to the deal, stating its earlier agreement with Future Group—when it had acquired a stake in promoter entity Future Coupons—restricted it from selling the retail assets to certain entities, including Reliance.

The legal battle between Future Group and Amazon is still ongoing. In the interim, it emerged in March that Reliance Retail had taken over more than 835 Future Retail stores, including the Big Bazaar supermarkets, after the latter had failed to pay the rents due to it.

This sudden takeover of stores was a surprise move. Bankers, angry they were not kept in the loop, published advertisements in newspapers warning people against dealing with Future Retail assets, as they had first charge over them.

Even as the legal tussle continues with Amazon, Future Group held meetings last week with shareholders, unsecured and secured creditors in compliance with the directions from the National Company Law Tribunal. While shareholders and unsecured creditors voted in favour of the deal with Reliance, secured creditors rejected the deal.

Who are the winners and losers?

The failure of the deal is a big blow for Kishore Biyani, who was the pioneer of modern retailing in India. Future Retail has already defaulted on its debt payments and Bank of India, the lender banker in the consortium of lenders to the company, has already filed a petition seeking insolvency proceedings on April 21.

Future Lifestyle Fashions may yet be revived. According to a report, the company has met its repayment deadlines so far and Biyani may look to sell some of the in-house fashion brands to raise funds.

On the other hand, Reliance Industries, which may have been unable to conclude the deal, may yet be the biggest beneficiary as it has already taken over 835 stores earlier this year. Many of these stores were in prime locations and thus will be an advantage for Reliance.

“After Future Retail failed to pay rents, landlords cancelled the lease agreements and in turn signed new lease deals with Reliance, which may now run the stores under its own brands,” said a source in the know. So, there may be no legal challenge here, either.

The assets in the stores, which the bankers have said they have the first charge on, have been stored, said the source. The bankers may have to take a call on that.

Lenders to Future Retail will now look to expedite the insolvency and bankruptcy process to recover whatever is possible from their dues. The overall debt of Future Group companies is reported to be around Rs 25,000-30,000 crore. Under the Insolvency and Bankruptcy Code, it could be a long-drawn process and may end up in deep haircuts.

Data from the Insolvency and Bankruptcy Board of India (IBBI) shows till December 31, of the total admitted claims of Rs 7.56 lakh crore, financial creditors were able to recover only Rs 2.50 lakh crore, which is a recovery rate of 33.10 per cent.

While bankers may yet recover some amount, as far as the shareholders of Future Retail go, they may be staring at a complete loss. In any bankruptcy case, equity holders come last in line and will only be repaid if any money is left after repaying dues to the secured creditors, other creditors and bond holders. Essentially, their investments will be more or less written-off. Not surprisingly, most of the listed companies of the Future Group, hit the lower circuit limit as shareholders rushed to exit.

Public shareholding in Future Retail stood at 85.69 per cent at the end of the March quarter. In Future Enterprises, public shareholding was at 82.97 per cent. Future Supply Chain had public shareholding of 77.38 per cent and it was 79.43 per cent in Future Lifestyle.

Promoter stake in these companies has fallen consistently over the last two years as lenders started taking over the pledged shares amid rising distress across companies.