November 27, 2018
Kishore Biyani’s Future Retail Limited (FRL) – the company that owns Big Bazaar, Foodhall, Nilgiri’s and now Foodworld, among others – has been in Amazon’s crosshairs for a while now, but the latest buzz is that the ecommerce giant is now negotiating a wider agreement.
People aware of the discussions told The Economic Times that both sides are drafting a call and put option in their share purchase agreement that will allow Amazon to call for Biyani’s stake in FRL over the long term – perhaps even 8-10 years – subject to Indian laws. In other words, Amazon wants the option of buying out Biyani and taking over the company in the future.
“Amazon is betting that with gradual FDI relaxation in food processing and single-brand retail over time the current freeze will be removed,” an official told the daily. “Meanwhile, a clear realignment involving global players is happening in Indian retail and Biyani, too, would want to capitalise on that.”
While foreign retailers were allowed to hold up to 51% stake in local stores, subject to approval of state governments, under the UPA regime, the Modi government ordered a freeze on fresh FDI in the retail sector when it came to power in 2014. However, the norms allow a single foreign portfolio investor (FPI) to hold up to 10% in multi-brand retail companies. Hence, Amazon has, so far, made all its investments in brick-and-mortal retail through a registered FPI owned by it.
The same is true for the deal being cooked up with FRL. According to the daily, in the first leg of the agreement – which is close to being finalised and is expected to be announced in December – the Seattle-headquartered retailer will buy up to 9.5% stake in FRL through the FPI route. Biyani and his family members own 46.51% of the company, of which 40.3% was pledged as per September 2018 filings.
The current market cap of FRL is Rs 26,543.15 crore. Citing sources the report added that Amazon is likely to give a significant “control” premium of around 25-30% for their right to call upon the shares, and the granularities of the agreement are being hashed out.
According to experts, put/call option clauses are governed by the Securities and Exchange Board of India’s (Sebi’s) circular of October 2013 and the Reserve Bank of India’s foreign exchange regulations. “It is further subject to Sebi’s block deal/bulk norms and Sebi takeover regulations (based on the percentage of shares being bought). As per RBI norms, if a foreigner is buying from an Indian person, then the price at which the shares will be sold by the Indian person would need to be at or higher than the fair market value prevalent at the time of the sale as per Sebi pricing norms,” Suhail Nathani, managing partner of law firm ELP, told the daily.
Besides FRL, Biyani controls three other listed entities, namely Future Consumer, Future Lifestyle Fashions and Future Supply Chain Solutions, collectively boasting over 80 consumer product brands. So Amazon and the Future Group are reportedly also inking agreements across the fashion and FMCG verticals to leverage on the network effect. Furthermore, plans to streamline the payment options of both players – Amazon Pay and Future Pay – to create a bigger eco-system are also being explored.
A deal with FRL will give Amazon access to the former’s pan-India footprint. The retail network boasts over 2,000 stores in 355 cities and towns in every Indian state except Arunachal Pradesh. Each of these stores can act as a primary distribution points for a digital player like Amazon, allowing it to extend food and grocery deliveries within a 2-3 hour time frame.
Similarly, Amazon stands to leverage Future Lifestyle Fashions’ clothing and footwear brands, including Lee Cooper, Converse, Sketchers, Indigo Nation and Scullers, by creating exclusive digital storefronts for them on its portal. Amazon could also create exclusive digital store fronts for company-operated chains such as Central and Brand Factory.
Amazon’s interest in FRL comes against the backdrop of increased competition in the retail landscape, which is expected to mushroom by 60% to reach US$ 1.1 trillion by 2020, on the back of factors like rising incomes and lifestyle changes by middle class and increased digital connectivity.
The ecommerce giant has, in fact, been looking at strategic investments in top brick-and-mortar chains as the focus increasingly switched to the omnichannel format. In September, Amazon, along with private equity firm Samara Capital, bought Aditya Birla Group-owned ‘More’ retail chain.
Previously, it had picked up a 5% stake in Shoppers Stop. The buzz is that it is now eyeing a minority stake in Spencer’s Retail.
Meanwhile, FRL nurses omnichannel ambitions, too, and that’s where Amazon fits in. Last November the company unveiled a 30-year vision, Retail 3.0, to chart its course to becoming Asia’s largest integrated consumer retailer by 2047 with revenue of in excess of $1 trillion. This blueprint was reportedly modelled on Alibaba co-founder Jack Ma’s “New Retail” theory, which seeks to redefine ecommerce by enabling seamless engagement between the online and offline world.