Amazon, Reliance and Future (of) Retailing

[protrade]

It now appears that there may be a cloud over Kishore Biyani’s distress sale of Future Retail to Reliance Retail.

Amazon has an extremely strong case on 2 fronts - they have a right of first refusal which Biyani didn’t honor, plus they have an explicit black-listing of any transaction with Reliance Retail.

So irrespective of what happens with Future Retail, it is highly unlikely that Reliance Retail will be able to buy it on the cheap.

My guess is that Amazon is not going to let this slip easily - and they will ensure that Biyani pays a price for ignoring Amazon’s overtures.

This is likely to end with status quo ante for Reliance Retail, and a huge loss for Kishore Biyani. Amazon may not explicitly benefit from this - except to extent of preventing the sale to Reliance Retail.

But there are some interesting tidbits that are coming out in court. Amazon’s cosy relationship with Narayanamurthy’s Catamaran on Cloudtail to bypass foreign restrictions is already well known. Now it seems like they also have a willing partner in Premji Invest - to buy Future Retailing on the cheap.

I don’t think Mukesh Ambani will take this lying down - so expect some attention on Catamaran and Premji Invest’s willful bypassing of foreign restrictions on retail in coming future.

But in short term, this is a negative for markets, and this sort of confusion is probably not the best thing for Reliance and Future retailing, right at the start of the festival shopping season!

 

[protrade]

CCI ruling in favor of Reliance seems like extremely positive thing - but in reality, CCI was never the issue. Despite the top two players in physical retail being involved, CCI also knows that both players have an insignificant presence in the game that matters - which is online retail. So CCI approval was somewhat expected.

The real battle is before the courts. My take is that Reliance likely will win the battle in the courts - but it may take some time.

Amazon has a strong moral case - where Kishore Biyani made some commitments, and refused to honor his commitments. But Amazon has a weak legal case, because Kishore Biyani is not the same as Future Retail - and Future Retail is not bound by whatever Kishore Biyani agreed to.

Yes - Amazon has a strong case against Kishore Biyani for violating the commitments made - but the catch is, they can at best get their money back, with interest. They can’t stop this deal between Future Retailing and Reliance.

Amazon was forced to do this deal with a convoluted structure, because of Indian laws restricting FDI in multi-brand retail. India needs to do a rethink on these laws - because they make little sense in today’s world. Multi Brand retail is a large industry, but it’s definitely not something with strategic consequences- like Defense or Telecom or Banking. Considering we allow FDI even in strategic industries, this restriction on FDI in multi brand retail makes zero sense, and it distorts the market against Amazon and Walmart. We need to create a better environment to encourage FDI - and such rules are not going to help.

My sense is that Amazon might lose the legal battle - but probably this will be a wake up call to the government - to remove silly restrictions. As it is, many people feel that the Modi administration is convenient for Ambani abd Adani - and such ridiculous rules only encourage such perceptions, which is unhealthy and unfortunate.

 

[protrade]

At current prices, Reliance is trading at 30 times past 12 months earnings. Of which 2 quarters were badly hit by COVID - with their Oil and Retail business seeing massive impact.

Oil prices are firming up as the global economy sputters back to life. And retail has seen signs of recovery - with lockdown fatigue becoming the trigger for good footfalls and sales during the recent festival season.

My sense is that there may not be much downside from these levels even if the Amazon-Future ruling goes against Reliance - but the upside could be huge if it is in favor of Reliance. Max 5% on the downside, but almost 20% on the upside.

But there is another aspect to it. If Reliance doesn’t buy Future Retail, Future will actually be “damaged goods” - so, losing Future actually will save Reliance ₹25,000 crores in upfront cash, and ₹20,000 crores in assumed debt - and whoever acquires Future will find it less attractive because of the erosion impact on the business from protracted proceedings. Reliance may like to keep Future in-house, but may not mind it too much if someone else ends up acquiring a much weaker Future!

At current share prices, as investors, the risk reward equation seems to be heavily in favor of reward.

 

[protrade]

The Delhi High Court judgement is now out - and to put it very mildly, it is quite an interesting judgement.

The judge denied Future’s request to ban Amazon from interfering in their deal with Reliance. Which seems like it is a loss for Future.

However , far more importantly, the judge has presented her opinion on other matters - that this deal is in accordance with Indian law, and secondly, Amazon’s contention that it has the right to block this deal is against current Indian law - which prohibits a foreign player from “controlling” interest in multi-brand retail.

If you dissect this judgement, few things become obvious. Future’s attempt to block Amazon from writing to regulators, was just pointless. You can’t muzzle anyone from saying what they want to say or write any letter to anyone! If there is any thing wrong with such a letter, there is a process of defamation, etc, which is the recourse. So this part of the lawsuit was anyway not something they could have won!

But the other part - that this deal is in accordance with Indian law - is pure gold for Future and Reliance. The writing is on the wall for Amazon - that they can obstruct to whatever extent they want, if that’s their ploy - but ultimately, they can’t stop this deal.

My sense is that Amazon will not want to muddy the waters any more, and will prefer to use this to enter into some sort of friendly arrangement with Reliance - probably even take up a stake in Reliance Retail - which has long been spoken of. It simply doesn’t make sense for them to double down on this court case, now that it is clear they will lose ultimately.

They still have a solid case against Kishore Biyani - but I think their real ploy should be to leverage this situation to invest in Reliance. Or to leverage this situation to get the rules changed in India.

Now that Trump is on his way out, they may have a better ally in Biden, to put pressure on India to open up Retail. That would probably be the best outcome for Amazon.

In my opinion, this actually presents a SCREAMING BUY as far as Reliance is concerned! They now know they will buy Future - at rock bottom prices - and it’s just a question of time. They get massive edge in the grocery space.

 

[Dr. Jan Itor]

On cursory reading (of only newspaper reports), the judgement seemed nonsensical... on one hand they say that amazon's entry was illegal as per existing multibrand retail laws... on the other hand it says that award by arbitrator is also valid... it says that FR can't do anything without consent of FC, but it also says that Amazon, which holds 49% in FC cannot interfere as a "controller"... HC has not done a damn thing to clarify the situation one way or another...

 

[protrade]

On cursory reading (of only newspaper reports), the judgement seemed nonsensical... on one hand they say that amazon's entry was illegal as per existing multibrand retail laws... on the other hand it says that award by arbitrator is also valid... it says that FR can't do anything without consent of FC, but it also says that Amazon, which holds 49% in FC cannot interfere as a "controller"... HC has not done a damn thing to clarify the situation one way or another...

While confusing, it’s not “nonsensical”.

Amazon has a complaint, and it’s a legitimate complaint - Kishore Biyani made a commitment to them, and he is not honoring that commitment. Future Coupons made a commitment to them, and is not honoring that commitment. Which means, they have a right to be heard, and a right to address their grievance the way they believe fit.

That being said, Future Retail’s contention is that they don’t know/care about any commitments made by other parties - and they have a right to do what is best for them. Secondly, they contend that Amazon cannot ever have any right over Future Retail, because such a right would be against the current multi-brand laws of India. Both of these are valid points.

What the judge is effectively saying is this - Amazon has to fight against Kishore Biyani and/or Future Coupons - for breaching the commitments made by them. And till that process is completed, Amazon has a legitimate right to ensure that this deal between Future Retail and Reliance doesn’t get consummated.

Imagine a scenario where Amazon can prove that Kishore Biyani’s reneging on his commitments has caused irreparable harm to Amazon, and he must pay some ridiculously high compensation to Amazon. And Kishore Biyani doesn’t have that money to pay. Then what happens? Amazon can probably squeeze him to make him toe their line. Which is probably their only real option.

Alternately, they could be using the poison pill approach. If they delay the conclusion of this deal by enough time, Future Retail will probably be worthless! These are all fairly common legal tactics.

 

[Dr. Jan Itor]

While confusing, it’s not “nonsensical”.

Amazon has a complaint, and it’s a legitimate complaint - Kishore Biyani made a commitment to them, and he is not honoring that commitment. Future Coupons made a commitment to them, and is not honoring that commitment. Which means, they have a right to be heard, and a right to address their grievance the way they believe fit.

That being said, Future Retail’s contention is that they don’t know/care about any commitments made by other parties - and they have a right to do what is best for them. Secondly, they contend that Amazon cannot ever have any right over Future Retail, because such a right would be against the current multi-brand laws of India. Both of these are valid points.

What the judge is effectively saying is this - Amazon has to fight against Kishore Biyani and/or Future Coupons - for breaching the commitments made by them. And till that process is completed, Amazon has a legitimate right to ensure that this deal between Future Retail and Reliance doesn’t get consummated.

Imagine a scenario where Amazon can prove that Kishore Biyani’s reneging on his commitments has caused irreparable harm to Amazon, and he must pay some ridiculously high compensation to Amazon. And Kishore Biyani doesn’t have that money to pay. Then what happens? Amazon can probably squeeze him to make him toe their line. Which is probably their only real option.

Alternately, they could be using the poison pill approach. If they delay the conclusion of this deal by enough time, Future Retail will probably be worthless! These are all fairly common legal tactics.

"Emergency Award (stopping the FR-RIL deal) was valid "
"Future Retail's resolution (approving the transaction with Reliance) was also valid"
Mutually contradictory. Hence nonsensical imo... Anyway, we can quibble about semantics till the break of day...
what is interesting to know is your take on in which scenario Reliance will benefit... because legal issues have a tendency to go on and on in which case Amazon will benefit.. Also, I have many a times wondered (on this forum) why they are doing it in the first place (apart from cheaply available)... Can't understand FR place in their business model... its not an enormous brand value and Rel already have a considerable brick and mortar footprint enough to support their growing venture... I would rather they spend their time on their online platform and collaboration with whatsapp and facebook which hasn't flown like we had imagined it to be... also would like to know your take on the likely timelines for resolution, as you are watching this much more closely...

(P.S: Btw LnT 75% FPI limit extended... something that was on your (and my own) platter... may find some legs on liquidity)

 

[protrade]

If you are asking about the logic behind Future Retail acquisition, it is quite clear what the logic is.

Throughout the world, there is a recognition that grocery delivery works differently than other areas. The requirement is typically in minutes or max hours. The closer analogy is to Swiggy and Zomato than to Amazon Prime.

For this ultra fast delivery, last mile presence is crucial. Especially massive warehousing capability near the customer. Reliance Fresh has decent footprint, no doubt, but they would rather increase their own footprint on the cheap, than have it fall onto lap of a competitor.

But there are other advantages. BigBazaar also has lot of valuable vendor relationships, being an early entrant in the space. They locked up quite a few vendors into exclusive deals - which now open up for Reliance. Also, Reliance hasn’t made much of a foray into private label - Kishore Biyani has obviously done far better.

But there’s also other aspects - the Central model of Future is something that doesn’t exist with anyone else. Kishore Biyani’s Central model is quite unique - its a full mall, with diverse units - but entirely owned and operated by one player - which optimizes staff costs and real estate costs significantly.

Just imagine - every store in a mall needs minimum staff strength - to handle leaves, lunch breaks, etc. Which means they usually run with more people than they really need. In the Central format - this inefficiency is dramatically reduced - across the entire mall you need a few extra employees - not for each and every store!

Kishore Biyani was a genius in retail, and he borrowed the Central model from Takashimaya of Japan pioneered the concept of one store in one mall - to dramatically optimize staff costs.

Being a pioneer, Future also has headstart in aspects like Training, and is present in prime locations, etc.

 

[protrade]

There was an article in the ET, asking What is the next trigger for Reliance.

https://www.google.co.in/amp/s/m.ec...ger-for-reliance/amp_articleshow/79854153.cms

And I think Vedanta is an excellent example for trigger. Vedanta won the arbitration against the tax demands of the government. And if you see this track record of late, government has been losing such cases with unfailing regularity.

The biggest case is against Reliance - big enough to materially impact Reliance. And there are multiple indications that Reliance is going to win - because Reliance has won all the intermediate battles - every single one.

It stands to reason that the ultimate result also will be in Reliance favor. Almost guaranteed so.

And this is big enough to be a big trigger for the stock. The sort of move we saw in Vedanta today, could easily be possible in Reliance when this news comes out. And best part is that Reliance has already provided for this going against them - so when they win it, those provisions go straight to bottom line.

 

[Vmaster369]

reliance and amazon there is no comparision
bhavnagri ghattia cann;t complete with taklu amazon no way lol amazon is x 3 times of reliance and it earn in Dollars so mhm .
well x2 times after separation of wife ...

But yeah i am sure there will be Technology company that will overtake reliance wait there already is apna TCS mahan

Apna Dmart radha krishna is already ahead of jio .dmart quality of product jio is no match

Mital is already fighting already jio lol in telecome space.

Eak Ambani sab pe bhari lol

The way Dmart sales are growing Dmart willbe on top always in retail space.