What does the Future deal collapse mean for Amazon and Reliance?

20 months after announcing that it would buy Future Group’s retail, wholesale and logistics business for Rs 24,713 crore, Mukesh Ambani’s Reliance Industries on Sunday backed out of it. 

Reliance said the deal cannot be implemented after the secured creditors of Future Group’s flagship firm Future Retail, which operates Big Bazaar and Easyday stores, voted against it. 

Once India’s second-largest retailer with more than 1,500 stores, Future Retail along with other group companies are now expected to go to the National Company Law Tribunal as lenders seek to recover their dues of almost Rs 29,000 crore under the Insolvency and Bankruptcy Code. 

The deal has been at the centre of a lengthy legal battle between Amazon and Reliance.  Amazon has challenged the takeover in various forums and obtained legal injunctions that stalled the deal. 

In August 2019, Amazon had invested about Rs 1,500 crore for a 49% stake in Future Retail’s promoter entity Future Coupons, indirectly gaining a 4.8% stake in the former.

Amazon says its 2019 deal came with an agreement that bars Future Group from selling its retail assets to Reliance without its permission. 

Amazon was looking to expand its foothold in India’s vast retail market. In 2018, Amazon and private equity firm Samara bought food and grocery retail chain More from Aditya Birla Group. 

When it comes to tapping India’s retail consumer base, companies like Amazon face more hurdles. Foreign investment in offline multi-brand retail is tightly controlled. India allows 51% FDI in multi-brand retail under the government route, subject to the investor fulfilling several conditions. States can also decide whether to allow foreign-owned multi-brand stores.

India’s retail market was worth $883 billion in 2020, according to Forrester Research. The market size is expected to grow to $1.3 trillion by 2024, dominated by the grocery segment. 

With the Future Group’s retail, wholesale, logistics and warehousing units, Reliance was aiming to bolster its JioMart app and increase its presence in the online grocery delivery space. 

Even as the deal fell through, Reliance is in a sweet spot after taking over 947 stores of Future Group, citing non-payment of rent, after transferring the leases to itself.

These include 112 Central and Brand Factory outlets of Future Lifestyle Fashions. Reliance may reportedly bid for the remaining Future Group assets at the NCLT, leaving few options on the table for Amazon. 

  

According to Utkarsh Sinha, Managing Director, Bexley Advisors, Future Retail creditors, shareholders ended up worse off following this development. Reliance has scored a win in the short term. If Amazon seeks to limit the growth of Reliance, it can stretch the dispute. Reliance, however, got what it wanted, as it is evident now that Amazon underestimated Reliance. 

Future Retail last month said it was committed to taking back its stores which were taken by Reliance, saying it had been surprised by what it called "drastic and unilateral action" by Reliance.

Amazon and the lenders may also support the company’s effort in this regard. Meanwhile, Amazon also might continue its legal battle related to the deal between Future and Reliance.

Whatever be the outcome, Reliance will continue to enjoy its undisputable pole position in the country’s retail sector as the fall of India’s original retail king and Future Group founder Kishore Biyani is sealed. As for Amazon, the value erosion of Future Group’s assets in the past two years means its effort to make any progress on its offline retail ambitions in India has been futile.