A Project on

MERGER & ACQUISITION

Of

Reliance and Future Group

Prepared By

GROUP 6

Aniruddha Nath PGP/1110/06

Nabajyoti Das PGP/1140/06
Shivam Mittal PGP/1163/06
Anusha Dubey PGP/1208/06
Hardik Ohri PGP/1220/06
Utkarsh Ram Tripathi PGP/1259/06
Vandana Kumari PGP/1358/06

Submitted To

Prof. Sushil Khanna

AUGUST 30, 2021

INDIAN INSTITUTE OF MANAGEMENT, BODH GAYA

Uruvela, Prabandh Vihar, Bodh Gaya, Bihar 824234

 Executive Summary

The goal of this research is to evaluate the issues surrounding mergers and acquisitions, such as the reason for
this phenomenon, its influence on industry structure, and competitiveness. We also did a target business
valuation, comparing it to the actual price paid. We also looked at the influence on share prices to evaluate
the merger/wealth acquisition's impacts. The planned amalgamation of India's top corporations in their
respective markets/domains will signal a new step in the takeover of separate but related corporate
organizations in the Indian business landscape.
We are pleased to submit our project research on one of the biggest lawsuits in Indian business history that is
Amazon vs Future group ft. Reliance Industries.
Reliance Industries announced the acquisition of Future Group for INR 24,713 crore through its subsidiary
Reliance Retail Ventures Ltd (RRVL) on August 29th, 2020. For the target firm to survive and gain from the
pandemic, it was a vital step to join together, combine, and amalgamate. The Kishore Biyani Future group
was in debt to the tune of $2.5 billion. Any further delay might jeopardize its future ambitions, since regulatory
rejection could compel the Reliance to abandon the purchase. Future Retail (FRL), which owns the Big Bazaar,
which sells everything from groceries to cosmetics and clothes, and Future Lifestyle Fashions Ltd (FLFL),
which manages the fashion discount chain Brand Factory, were also to be purchased as part of the agreement.
Future Group needed to integrate certain businesses (Future Retail, Future Lifestyle, Future Consumer, Future
Supply Chain, and Future Market Networks) into Future Enterprises Limited as part of the deal (FEL). FEL
retained the manufacture and distribution of FMCG items, just as its coordinated design sourcing and
producing business, as well as its insurance JVs with Generali and JVs with NTC Mills, following this
acquisition. RRVL was also taking over the Logistics and Warehousing Undertaking. To complete the
transaction, Future Group combined these firms into Future Enterprises Limited (FEL).
But, back in August 2019 Future Retail inked another agreement with Amazon. Amazon purchased a 49
percent share in Future Coupons, an advertiser bunch organization of Future Retail, as a feature of the
understanding. Future Coupons claims 7.3 percent of the Future Retail organization. This implies that Amazon
in a roundabout way possesses 3.58 percent of Future Retail. A call choice was additionally given, which
could be practiced between the third and tenth years. Also, according to law, the call alternative licenses
Amazon to buy Future Coupons' stake in Future Retail.
As per Amazon, a state of the arrangement was that Future Group cannot sell its retail assets to anyone on a
"restricted persons" list that includes Reliance. As per this contention, the Reliance-Future understanding is
void.
Amazon documented an appeal with the Delhi High Court to have the arbitrator’s judgment maintained. The
single judge bench panel expressed the agreement ought to be required to be postponed, and requested Future's
Kishore Biyani's resources to be seized. The single judge panel deciding that had basically ended the deal was
retained by a bigger Delhi High Court board in February 2020. Amazon accordingly spoke to the Supreme
Court, which maintained the single judge panel choice from the High Court. Following the request, shares of
Reliance Industries and Future Group dropped.
 About Indian Retail Industry
The online Indian retail industry is one of the fastest growing industries in the country. We have been
observing a phenomenal growth in the market size of the industry. There are several categories which come
under the industry: apparel and footwear, consumer durables and IT, jewellery and accessories, health and
entertainment, home decor and furnishings, beauty and personal care etc.
The current market of the industry is estimated as USD 883 billion with grocery retail at an estimation of USD
608 billion. As per the recent rankings done by the different world agencies India stood at 63 in the World
Bank ‘s Doing Business 2020 publication whereas we stood at 73 in the UN conference on trade and
development business to consumer e-commerce index 2019. The stats also say that India is among the highest
in the world in terms of retail store availability per capita space. Also, we are the fifth largest retail destination
globally which is preferred throughout the world.
By 2024 the Indian e-commerce industry is expected to grow by USD111 billion which is 84%. A major driver
of this is the online platforms and the mobile shopping industry which has been growing recently. We expect
it to grow at 21% annually in the coming years.
Advantage of Indian retail industry:
• Robust Demand
• Innovation in finance
• Increasing investment
• Policy changes
Market size:

Key Trends:

Government Initiatives:
 Changes in Retail Industry
Retail industry in India is growing at a fast pace and sees a change from traditional Kirana stores. The growing
hyperlocal market, supermarkets and increased shopping malls shows the boom in the industry. The country
has shown an increase due to FDI and other major home segment players.
People are now going for convenience, comfort more than pricing. The changes in buying behaviour, improved
disposable income, improving lifestyle, & exposure to foreign industry are some of the factors that led to a
change in the industry.
The following changes are happening currently in the retail industry:
1. Online retail stores have increased in recent times. Almost all the big brands have their own retail and
online grocery stores. Online shopping has become the comfort for retail shopping. Companies are a
lot more on improving the customer experience.
2. Visual merchandising and display advertising in e- commerce. Product placement in the right shelf
increases the visibility of the brand for customers.
3. Retail stores are constantly improving with technology backed inventory, customer driven experiential
retailing.
Role of Mergers and Acquisitions in Corporate Strategy: Mergers and acquisitions are great strategies to
expand the business. It helps them in diversifying their offering by providing greater services and products.
By this they acquire more resources and thus can have a competitive edge over others. The company can
achieve economies of scale by operation cost reduction. It can also eliminate the competition and can also
help in saving a debt-ridden company. Other expenses like advertising cost can be reduced by it. Revenue
synergies can be flourish by the companies through which they can change market dynamics, sell more
products, increase the prices and thus the profits. Also, with M&A the company can get excellent talent as
well as Intellectual property which are the biggest asset for any company. It saves time, is a cost cutting
strategy & is the easiest way to add a new business model.

Brief History
Future Group: Future Group is an Indian Conglomerate. Future retail is founded in 1987 as Manz Wear
Private limited. In 1991 the company changed its name to Pantaloons Fashion India limited 50 % stake is now
owned by Aditya Birla Fashion limited. The other part is demerged from the company and now known as
Future Retail. It has multiple retail formats of hypermarket, supermarket and home segments. Through these
multiple formats it connects to the diverse community of Indian Consumers. The company has a pan India
presence and caters to the needs of 50 million members across India. It has 1511 stores across 450 +cities in
India. The company owns Big Bazar, Easyday, Fashion at Big Bazar, Hometown, Foodhall etc. Its fashion
and clothing outlets are Central, Brand Factory and Planet sports. This comes under Future lifestyle Fashion
limited. Italian insurance company Generali group started a joint venture with Future group as Future Generali
Insurance but FG backed out when it heard of L&T merger with the Italian company.
Amazon: Amazon started out by selling books online and now is the biggest internet company in the world.
Amazon was founded in 1994 by Jeff Bezos in his garage. In 1997 it went public and at the same time it started
selling audios, videos to the U.S Audience. It is a big 5 U.S. information technology company and sells almost
everything online. Amazon growth is highly attributed to its disruptive technology innovation and a mass scale
focused product. Amazon is largest online marketplace with products like online streaming platform,
ecommerce services, AI assistant provider, live streaming and cloud computing platform.
Reliance Retail: Reliance Retail Venture limited is a part of Reliance Industries and was founded in 2006. It
is the largest retail store in India. Its nationwide network of retail outlets is serving the shopping needs of
millions of people from groceries, food, footwear, apparel, electronics, home care, etc.
The brands are Reliance trends, Reliance Smart, Reliance Fresh, Reliance digital, AJIO, Hamleys, jio mart,
Reliance Jewels, Reliance LYF, Reliance Footprint, Netmeds, etc.
 Company Strengths and Weaknesses
Strengths of Reliance Industries
• Mergers and acquisitions: Reliance industries have demonstrated a track record of favourably
merging complementing businesses. In past years, it has effectively amalgamated a number of tech
firms to simplify operations thus developing a trustworthy supply chain.
• Well-built dealer community: It has made a standard among wholesalers and vendors in which
sellers’ market the organization's items as well as spend in instructing sales reps to disclose to clients
how they might take advantage of the things.
• Robust distribution network: Reliance Industries has created a reliable distribution network that can
cover the majority of its prospective market over time.
• Strong Brand Portfolio: Reliance Industries has invested energy and cash fostering a solid brand
portfolio. On the off chance that the organization wishes to fan out into other item classes, this brand
portfolio might be very useful in the coming future.
Weaknesses of Reliance Industries
• Day’s inventory is high compared to the rivals: Requiring the firm to get extra assets to put resources
into the channel. This might affect Reliance Industries' drawn-out development.
• Research and Development: Focus in R&D is lower than that of the business' fastest developing
organizations. Despite the fact that Reliance Industries spends greater on R&D than the business
normal, it has not been able to contend as far as development with the area's driving rivals.
• Limited success outside core business: Despite the fact that Reliance Industries is one of the
business' top organizations, its present culture has made it hard to venture into new item regions in
terms of its products. In terms of media services, the Voot app isn't as popular as other platforms like
Prime Video, Netflix, and Hotstar, which is its direct rivals. Even JioCinema falls short of its
competitors Netflix and Prime Video, whose primary business is online media streaming.
• Lack of USP: The company's product marketing leaves a ton to be desired. Regardless of whether the
item is a business achievement, its situation and exceptional selling suggestion are not clear cut, which
may prompt competitors to attack around here in near future.
Strengths of Future Group
• Well established in Indian geography: Future retail's Big Bazaar, the country's biggest hypermarket
chain with locations in over 100 cities, plans to build 16 more shops between 2020 and 2022. In
addition, as part of its expansion plan, the company is moving into India's smaller tier-II cities, which
are less impacted by the pandemic and have ambitions and a growing consumer class.
• Everyday low prices: The advertising effort of Future Retail's Big Bazaar, which is known for
charging less than others since it claims 'isse sasta or achha kahin nahi!' has cemented its place in
customers' thoughts. As the market becomes more competitive, the company's actions are distinctive
and have yielded positive outcomes.
• Single window shopping: The consumer's preferences are changing & they are moving from shop
stores to one stop modern retail outlets. Big Bazaar is known all over India for its one stop for a
variety of fashionable and affordable materials at one place. Which gave the organization the first
mover advantage to cater the above-mentioned changing behaviour of customers.
Weaknesses of Future Group
• Decreasing promoter pledge
• Declining revenue, profit & operating profits
 • Susceptible to foreign competitors: Future group is only present in Indian geography and thus is
unknown outside the nation. The Indian market is now being penetrated by many international players
and with future groups only having the Indian presence will force them to work more vigorously to
retain their customer for survival.
• Jammed retails during occasions: Typically, during the festive seasons, future group retail stores are
completely packed and overloaded as a consequence of their seasonal deals, resulting in an extremely
unpleasant experience for customers. As a result, the overall retention rate is reduced. Additionally,
there is a risk of damage in retail store shelves inventory.

Standard Ratio Analysis and Comparison

• Debt equity ratio

Debt equity shows us the financial leverage that the company has. With years passing by, Future Group has
been increasing its debt every year except FY 2017-18. Even though a debt equity ratio should not exceed 2
generally, we can see that in the FY 2019-20 the debt has outreached the total equity of the firm & in FY
2020-21 the ratio is a staggering 9.9 which means debt is almost 10 times of equity i.e., the firm is highly risky
to invest for the borrowers & investors since the firm is financing its growth through borrowings mainly,
which surely decreases the overall profitability of the firm.

But in the case of Reliance, we can see that the ratio was almost constant till FY 2019-20 but has dropped to
a mere 0.36 which indicates the firm is almost debt free & risk free & highly stable.

• Return on Capital Employed

The return on capital employed tells us how efficiently the firm has been managing its capital to generate
profits. For Future Group the ratio is descending every year & even becomes negative in FY 2020-21
indicating that the capital employed is unable to generate any profits i.e. the firm has incurred a loss in that
year. This loss can be attributed to the Covid-19 pandemic where it has lost more than 8500+ crores wherein
7,000 crores were lost in the 4-5 months of the shutdown during the first wave in 2019, after which Mr.
Kishore Biyani was left with no option other than selling the business to Reliance (around August 2020).
Around the same time the ROCE for Reliance can also be seen falling due to the Covid impact.

• Interest Coverage Ratio

The main reason for the Future Group acquisition was because the fixed costs of the rent, interest etc. did not
stop even when there was no income for the firm. This pushed the ICR of Future Group to fall & also become
negative in FY 2020-21 which meant that the firm could not even cover its interest payment which was obvious
because the firm ran into loss & had no means to repay the interest on such high debts. However, the ICR of
Reliance has been very stable with minimal debts.

• Inventory Turnover Ratio

The ITR represents how many times the inventory has been sold during the year, which has been decreasing
for Future Group. In the latest FY 2020-21, the ICR is 1.58 which is very low as it means that the total
inventory has only been replenished less than 2 times during the whole year which indicates very low sales &
high inventory stocks, which increases the warehouse costs etc. leading to increasing rents, interest etc. for
the firm as already seen above. However, the ITR for Reliance has been on the stable side except for FY 2020-
21 which was mainly due to the pandemic.
 Description of products, market shares, distribution
channels, technology, etc.
Some of the details of Reliance industries and Future group which also tells us about the various aspects such
as technology, some light on the market share they hold and also other factors such as distribution channel
and others:

Products Distribution Channel

• Future group a ritual store chain reaching small • Reliance industries have different supply
towns and cities. chains for different networks
• Tasty Treat, Karmiq, Kara, Sunkist, Mother • Taking the example of the farm and fork
Earth, Nilgiris, ThinkSkin, Lee cooper, Indigo model in case of reliance retail
Nation are among the leading brands from the
Future Group. • Reliance retail directly approaches the farmers
and directly supplies to various retails stores
• It also has Big Bazar as one of the famous and across India
leading brands, and other retail grocery brands
such as easyday, heritage is also part of the • Basically, reliance logistics is a asset based
future group company with its fleet of transportation and
various infrastructure facility
• The home brands include Dreamline dwell,
Laura Ashley. • The future group has a presence in almost 400
cities, it has around 1800 stores to serve the
• And the reliance industry is a conglomerate with customer
products like polymers, chemicals, petroleum
retail, textile, in-store brand etc. • It's also has dedicated portals that provide its
customer with easiness of home delivery

Market Share Technology

• Reliance Industries has total revenue of Rs 4.83 • The research and development and use of the
lakh crore, and it also contributes 6.8% of India best technology have always been central to
merchandise export the reliance industries.
• The company, from its textile to that of
• Reliance industries have Market cap of 14.79 telecom business (Jio) uses the best
lakh crore technology.
• The Reliance report said that their research
• The future group has 1800 stores and revenue
and development centre in Navi Mumbai is
from various sectors are as follows:
equipped with the country’s best technology.
• 5130 crores from future retail revenue Dec • According to one of the reports by Statista
quarter 2021 reliance industries have increased their
expenditure over research and development
• Rs 688 crore from future consumer tasty treat, year by year as some of the details of various
prim and others and Rs 1365 core revenue from years are: FY 2018(Rs18.24 billion), FY2019
future lifestyle as of March quarter (Rs23.77 billion), FY 2020 (Rs25.38 billion)
 Background and Chronology of Events
Reliance and Future Retail Acquisition
January 2019 - Amazon decided to buy a 49% stake of the future coupon - a Future group promoter entity for
Rs 1451 Crore. This indirectly gives Amazon a stake in Future retail. As part of the agreement, it allows the
company the option of acquiring the promoter shareholdings of the Future Retail.
The agreement to acquire the retail and wholesale business of Future group into Reliance was signed by the
company on 29th August 2020. This agreement will result in merging Future retail, Future lifestyle group,
Future consumer, Future logistics, and market network into Future enterprise limited. The buyout cost
Reliance a whopping 25000 crore.
Amazon challenged acquisition of RRVL and the future group in Singapore International Arbitration Centre
(SIAC) as it has a stake in the company. SIAC rule was not enforceable in India and SEBI approved the
acquisition. Amazon takes the case to HC where the company doesn't get relief and thus it moves to the
Supreme court where the deal is finally put into hold by the bench. The whole battle of Amazon Vs Future
Group is the biggest lawsuit in recent times and took more than one year to resolve.

Chronology of Events
 Motivations for Acquisition
The online commerce has been mostly covered by Amazon and Walmart-owned Flipkart and Future Group
from India has been seen into a debt-laden retail ambitions cave. Reliance being a conglomerate is looking to
acquire the debts of Future group to enlarge their footstep in the field of Retail in India for Rs 24713 crore
($3.4 billion).
"The transaction is credit positive because it will solidify its (RIL's) position as the largest organised retailer
in India and further diversify its earnings," Moody's Investors Service said in a note.
They also mentioned that the cost of the acquisition would be small for RIL despite the fact that the price tag
is USD 3.4 Billion. The total asset of RIL is around USD 155 Billion and it is USD 12.8 Billion when we
consider the consolidated EBITDA as per the financial year 2019-20. Under this deal of $3.4 Billion, Reliance
Retail Ventures Ltd (RRVL) a wholly owned subsidiary of RIL will acquire the Supply chain, apparel and the
grocery businesses of the Future Group. All these entities are grouped under a different listed subsidiary which
will be merged into FEL before it gets transferred to RIL.
After the acquisition, the distribution and manufacturing of FMCG, the insurance joint venture and the
manufacturing and sourcing of the apparels will be retained by FEL. The acquisition was expected to be closed
under a period of 6-12 months subject to the approvals by authorities.
Motivation for Future Group:
The major motivation for the future group to exit this business was their loss of 7000 crores in the first 3-4
months of Covid. since the amount was too much and the rent along with the interest was not stopping whereas
COVID-19 came with a halt to the revenues.
The business was so designed that it would become profitable after reaching 90% of the target but in the given
scenario the maximum possibility was to reach 70 to 80% of the target. So, in the long-term planning 5 to 10
years, it was not easy for the future group to bring up the physical stores and hence Mr Biyani decided to sell
off the entity. Through this deal the once called India’s king of retail Mr Kishore Biyani would be able to cut
his debt by 2 billion.
Motivation for Reliance: Reliance has been a big conglomerate with a strong foothold in all the sectors. With
a hold of 41.5% market share of organised retail space, they have a very good hold of the market. They believe
that this acquisition will help them to evolve along with the modern retail market of India.
Apart from this Reliance would also be able to penetrate into the states and territories where they have not
been able to manage their presence. Though the current entities under the future group around the use financial
stress but Reliance would not be impacted much due to it.
As per a few investor analysis services, it was expected to bring a synergy of USD dollar 8 to 10,000,000,000
over the next few months for Reliance. Also given the good cash flow status and history of Reliance it is
expected that they will be able to maintain the status of being debt free and the proposed acquisition will also
increase the company's dependence on the Indian economy as a source of revenue.
Motivation for Amazon: It started in Aug 2019 when Amazon bought a 49%stake of Future Coupon- a Future
Promoter Identity. Future Coupon is a part of Future Retail. Amazon proposed the acquisition in the
Competition Council of India. The notice was approved by CCI.
1. Amazon to acquire 49 %stake of Future Coupons.
2. Transfer of some shares of Future Retail to Future Coupons. FCL got an equity warrant of 7.3 %
of the share capital of FRL.
3. Amazon would have a stake of 3.58% in Future Retail.
4. Amazon also acquired a call option in which it can acquire all or some parts of Future group. Also,
the company mentioned 30 entities from which Future Group can’t transact. Reliance retail was
also mentioned.
Now in Aug 2020 Reliance announced the plan of Acquiring Future Retail, logistics and warehousing business
in 25000 crores. Thus, Amazon feels this is a breach of their agreement and it has all the right to call off the
deal.
 Event Study Analysis
We conducted an event study analysis to measure the cumulative abnormal returns (in percentage terms) for
both the target firm (Future Retail Limited) and the bidding firm (Reliance Industries)

A 31 days event window has been taken spanning from 10th August’ 2020 (Day -15) till 21st Sept’ 2020 (Day
15) with Day 0 being the date of announcement of takeover, i.e., 31st August’ 2020 (the exchange was closed
on 29th August 2020; hence, we have chosen the immediate next trading day). The stock price data of Future
Retail and Reliance Industries, as well as the market (Nifty 50) values were extracted from the official site of
National Stock Exchange of India, following which the daily returns were calculated. This gives us the actual
returns of the target and the bidding firms for the event window.
A sample is shown below:

Figure: Calculation of Daily Returns for Future Retail, Reliance Industries and Nifty 50
The next step would be to calculate the predicted returns for both the firms. For this, the methodology used
was the market model method. For this purpose, we have chosen a clean period of 200 days from 11th Sept’
2019 (Day -240) to 02nd July’ 2020 (Day -41) assuming that no information related to the event was released.
We ran a regression analysis over the clean period window between the firms’ daily returns data and the
market daily returns data and estimated the alpha and beta coefficients for both the target and the bidding
firms, the results of which are as shown below:

Figure: Results of Alpha, Beta and R Square for the Target Firm: Future Retail

Figure: Results of Alpha, Beta and R Square for the Bidding Firm: Reliance Industries Limited
After the estimation of the regression coefficients (beta) and intercepts (alpha) for both the firms, the predicted
returns for a given day in the event window for a given firm would be:
Predicted Returns on Day T = Alpha + Beta * Market Returns on Day T
The abnormal returns for any given date in the event window would be the difference between the actual
returns and the predicted returns for that day.
Abnormal Returns on Day T = Actual Returns on Day T - Predicted Returns on Day T
Finally, we arrive at the cumulative abnormal returns for the entire event window by adding the abnormal
returns of all the days in the event window.
CAR = Cumulative Abnormal Returns = The addition of abnormal returns of all the days in the event
window
The t-statistic value (which shows the statistical significance of the event) is calculated as:
T-stat = CAR / Square root of variance of event window abnormal returns
For the given event which we have considered, the cumulative abnormal returns for the target firm, i.e., Future
Retail turns out to be 8.06 % (t-stat of 1.11 which is statistically insignificant) and the cumulative abnormal
returns for the bidding firm, i.e., Reliance Industries turns out to be -2.11 % (t-stat of -1.51 which is statistically
insignificant).
The deal was announced to be an all-cash deal, with Reliance Industries ready to pay Rs. 24,713 Crores and
acquire Future Retail’s assets at a premium and cover for the huge debts which Future Retail had burdened
on itself owing to huge losses in revenues in FY 2019-20 on the wake of the Covid-19 pandemic. Following
the news of the announcement of the takeover, there was an equity value gain of 8.06 % for the target firm,
i.e., Future Retail, which shows that the news of the takeover was received positively by the investors and
the shareholders of Future Retail.
The computation table for arriving at the cumulative abnormal returns for both the firms are shown below

Figure: Computation Table for Measurement of Cumulative Abnormal Returns and t-stat values for Future
Retail and Reliance Industries Limited
 Valuation of Target: Future Retail
For the purpose of this, we went ahead with an intrinsic valuation of the target firm stock, i.e., Future Retail.
We prepared a Discounted Cash Flow Valuation Model and under this approach, the enterprise value for
Future Retail comes to be Rs. 20,596.57 Crores, as against the offer of Rs. 24,713 Crores made by Reliance
Industries to acquire Future Retail in an all-cash deal. It shows that Reliance Industries is ready to acquire
Future Retail’s assets at a premium and cover for the target firm’s debts. The intrinsic share value for Future
Retail turns out to be Rs. 226.04, against the market share price of Rs 162.35, which was the price at which
Future Retail was trading on the date of announcement of takeover. It shows that the stock price of the firm
was undervalued by Rs. 63.69, and the decision to acquire Future Retail at a premium is justified. For arriving
at the enterprise value, the following assumptions have been made:
• Revenue growth has been assumed to be at 9.50%, during the period of high growth over which the
future free cash flows to the firm have been expected
• Gross Profit Margin has been assumed to be at 26.19%
• Depreciation and amortization expenses has been projected by forming a depreciation schedule
(Computation has been shown below)
• Finance costs have been projected by preparing a debt schedule (Computation has been shown below)
• Changes in Working Capital and Capital Expenditure has been projected over the period of high
growth of the firm (Computation has been shown below)
• Terminal growth rate has been assumed to be 6.75%, which is in line with the expected long term
inflation rate of India. It is assumed that the firm will be growing at a stable rate of 6.75% forever, in
line with the expected long term inflation rate.
The complete Discounted Cash Flow Valuation Model for Future Retail is as shown below:

Figure: Discounted Cash Flow Valuation model for Future Retail

The Free Cash Flows to the Firm has been discounted at the weighted average cost of capital of 7.64%. The
computation of the Weighted Average Cost of Capital (WACC) is as shown below:

Figure: Computation of Weighted Average Cost of Capital

In addition to this, the computations for the various projections of line items in the DCF model are as shown:
 Figure: Debt schedule for projections of Finance Costs

Figure: Depreciation schedule for projections of Depreciation and Amortization expenses

Figure: Change in Working Capital Projections

Figure: Capital Expenditure Projections

 Impact of acquisition
Every acquisition doesn’t create only a positive impact on the companies. It establishes both the positive and
some negative consequences. Sometimes, it may make an extreme situation on either side.
Here we will be studying the detailed impact of Reliance acquiring the future group a $3.3 billion deal done
with acquiring 2000 retail stores and a Big Bazar chain of grocery stores. Its acquisition also includes the
acquisition of a wholesale business and the logistics and the warehousing business.
• The 1st and foremost benefit of this deal will be that Reliance will be able to improve and broaden its
reach all over the country; Reliance is already into the business of retail through reliance fresh retail
stores over the country which was founded in the year 2006 and as of 2020 currently have stores at approx.
11784 locations,
• But this was not enough to grab the retail business in India so, RIL acquired a future group and this
acquisition will improve its reach significantly.
Also, the RIL new business, Jiomart, which delivers groceries, apparel, and other items and has a network in
around 200 cities, will gain an edge with the acquisition of a wide supply chain of future groups.
This will help improve the extensive reach; not only with this acquisition, but RIL is also ready to compete
with its competitors like Amazon India and Walmart, Flipkart.
• This acquisition includes the entities of the future group, which are retail, lifestyle, consumer, and others;
this acquisition is expected to bring the sale of Rs26000 crore, which will make the RIL seven times bigger
than its rival Avenue mart (Dmart) as the retail empire of Reliance will worth after the acquisition approx.
Rs1.89 lakh crore.
And also, the future group holds a stronghold in 2 sectors which are grocery and fashion, and this sector
offers RIL with a good margin and Reliance don’t want to miss this opportunity
So, to improve its reach and add more revenue to its current business, the acquisition of future groups will
play a significant role.
The margin these sectors currently offering to RIL are:

Table:1

Segment Brands Margin

Grocery and Food Reliance Fresh, Reliance Smart, Reliance Market 6.54%
sector

Lifestyle sector Reliance Trends, Footwear, Jewels by Reliance, and 23.8%

AJIO

Consumer Electronics Reliance Digital Jio stores 6.2-2.1%

The retail business of Reliance just accounted for around 8% and the major contribution is by the consumer
electronics which consist of 61% of the business
From above pie chart we can see that with 61% of share in the consumer electronics and highest revenue
recorded as observed in (table 2) but the grocery and fashion and lifestyle segment also performing well the
current grocery segment of Reliance is estimated to be at $545 Billion and in coming 5 years it is expected to
grow at $850 billion,
To achieve the target in the coming years and to grow at a significant rate acquisition of future groups will
create a push.

Table:2

Sector Revenue YoY Growth (FY 2020)

Consumer electronic ₹44,635 crore 14.5%

Lifestyle and Fashion ₹13,452 crore 24%

Grocery ₹34,501 crore 47.8%

Reliance retail in the year 2020 is registered with the 640 million footfall, and the acquisition of future group
will add the 314 million loyal customers base to the reliance retail store chain.
And according to one of the reports by Goldman Sachs, it is expected that by the year 2024, the Reliance will
cater to half of the orders in India through jiomart i.e., five million orders expected the acquisition will prove
helpful to Reliance in achieving such goals every day.
• Amazon’s plea against this merger in the court due to its share of 3.58 % in future group retail as amazon
pleaded against the non-compete agreement with biyani led chain; this has 2 major impacts; one was the
merger was kept on hold until the final verdict is made.
• Secondly, news hit the market and the reliance share went down by 2% and future group share down by
around 10% as on 7th August, 2021
 References
[1] Chronology:
https://www.google.co.in/amp/s/m.economictimes.com/tech/newsletters/ettech-unwrapped/amazon-reliance-
and-the-fight-for-future/amp_articleshow/85119987.cms
[2] Future Group History:
https://www.nextbigbrand.in/brand-story-of-future-group-and-the-man-behind-its-
success/https://economictimes.indiatimes.com/future-retail-ltd/infocompanyhistory/companyid-45395.cms
[3] Reliance Retail History:
https://en.wikipedia.org/wiki/Reliance_Retail
https://relianceretail.com/
[4] Amazon History:
https://en.wikipedia.org/wiki/Amazon_(company
[5] Why Amazon Objected Reliance Future Group Merger:
https://inc42.com/features/amazon-vs-future-feat-reliance-the-massive-case-explained-in-6-points/
[6] Motivation of merger:
https://www.campaignindia.in/article/reliance-retail-to-acquire-future-group/463337
[7] Industry analysis:
https://www.ibef.org/industry/indian-retail-industry-analysis-presentation
[8] Role of Merger in Corporate Strategy:
https://corporatefinanceinstitute.com/resources/knowledge/deals/merger/
https://hingemarketing.com/blog/story/mergers-and-acquisitions-as-part-of-your-growth-strategy
[9] Change in Retail Industry:
https://www.indifi.com/blog/top-3-trends-changing-retail-industry/
https://www.fibre2fashion.com/industry-article/2411/the-changing-face-of-the-indian-retail-industry
[10] Valuation of Future Retail: Annual Report 2019-20, Future Retail Limited; Annual Report 2018-19,
Future Retail Limited
[11] Event Study Data for Measurement of Cumulative Abnormal Returns:
https://www1.nseindia.com/index_nse.htm
[12] Ratios for comparison: Moneycontrol
https://www.moneycontrol.com/india/stockpricequote/refineries/relianceindustries/RI