Kishore Biyani-led Future Retail Ltd on Monday said it agreed to buy the retail business of Hyderabad-based Heritage Foods Ltd, promoted by the family members of Andhra Pradesh chief minister N. Chandrababu Naidu, in an all-stock deal.
Under the terms of the deal, Heritage Foods will get a 3.65% stake or freshly issued shares worth Rs295 crore in Future Retail. Heritage’s retail business includes the popular Heritage Fresh chain of 124 stores in the three key southern cities of Hyderabad, Bengaluru and Chennai.
The stores sell a range of household items, fast-moving consumer goods (FMCG), staples and fresh fruits and vegetables.
“Heritage Foods will spin off its retail, bakery, agri-sourcing and veterinary care business in a fully owned subsidiary. Subsequently, all these businesses, except veterinary care, will then be merged with Future Retail,” Future Retail said in a statement.
The retail and allied businesses of Heritage Foods posted a revenue of Rs629.70 crore during the fiscal ended March.
Future Retail said the Heritage stores will complement its existing network of 379 small-format EasyDay stores in north India. “The consolidation of Heritage small-format stores brings us closer to the homes of customers in the three key metros in southern India,” said Kishore Biyani, chairman and managing director of Future Retail.
“Scale plays an important role in retail, and this forms part of our strategy of aggressively expanding our small stores network to around 3,000 stores nationally by 2021...,” Biyani added.
Heritage retail also includes the company’s agricultural pack houses in Chittoor, Andhra Pradesh and Medak, Telangana, which form the fruits and vegetables supply chain for the retail stores. Heritage also has a bakery in Hyderabad which markets its products through the retail stores, apart from supplying them to quick serve restaurants.
“We are happy to have found a partner in Future Group to expand our retail business, as Heritage Foods continues to focus and expand its dairy and renewables energy business,” said N. Brahmani, executive director of Heritage Foods and daughter-in-law of Chandrababu Naidu.
The deal is a win-win for both Future Retail and Heritage, said an analyst. “The whole supermarket model, which Reliance Fresh, More, EasyDay and Heritage have been following , is a difficult one to crack,” said Harminder Sahni, founder and managing director of Wazir Advisors, a retail and consumer consulting firm.
“Either people are getting out of it or people are selling it to Future Group, cases such Nilgiris, BigApple, EasyDay and now Heritage,” Sahni said. “Mr. Biyani has a strategy, which is more driven by brands and FMCG of private labels. So he is taking all the stores in.”
Sahni said that for Heritage, the sale of its retail business is like taking the “burden off the shoulders” and focus on its dairy business, which is doing well.
“Retail business needs huge involvement and is capital intensive at a time when Naidu and his son Lokesh are busy with their political careers,” Sahni said.
Shares of Future Retail gained 1.36% to Rs152.65 on BSE, while the exchange’s benchmark Sensex rose 0.68% to 27,458.99 points.
Heritage Foods shares rose 9.55% to close at Rs879.60 on Monday.