Future Group founder Kishore Biyani (Photo: Abhijit Bhatlekar/Mint)
Future Group founder Kishore Biyani (Photo: Abhijit Bhatlekar/Mint)

A deal with Amazon is bringing little joy to investors of Future Retail

  • After Future Retail announcing Amazon will buy 49% in Future Coupons, the Future Retail stock declined by 4.6% on NSE
  • Notwithstanding the benefits from the Amazon deal, the consumption slowdown in the economy should keep valuations in check from a near-term perspective

Investors should have been overjoyed when Future Retail Ltd finally announced its deal with Amazon. For many months now, news reports were abuzz about its impending deal with the US e-commerce behemoth.

Yet, when Future Retail said that Amazon will buy 49% in Future Coupons Ltd, which holds Future Retail warrants amounting to about 7.3% stake on conversion, the Future Retail stock fell by 4.6% on NSE.

This is when, according to news reports and analysts, the transaction is said to have taken place at a significant premium to the warrant issue price of 505. Future Retail has not disclosed the deal value.

“We arrive at an implied acquisition price of 773, a 53.2% premium to the warrant conversion price," said analysts at Edelweiss Securities Ltd in a report on 23 August.

This assumes that the balance 1,500 crore needed from Future Coupons to buy the warrants is the same amount that Amazon would have invested as part of the current deal. Note that the warrants were issued to Future Coupons at 2,000 crore, out of which it has already invested 500 crore.

If the deal with Amazon has been clocked at a premium then what can possibly explain the stock price reaction? According to Himanshu Nayyar, an analyst at Systematix Shares and Stocks (India) Ltd, even as the deal is positive, the quantum of stake at 3.6% in Future Retail is low. “We were looking at Amazon buying a 10% stake in Future Retail. A higher stake would have perhaps assured more commitment from Amazon," he said.

Still, Amazon has a call option, where it can acquire all or part of the promoters’ shareholding in Future Retail between 3 and 10 years, “in certain circumstances, subject to applicable law".

“We perceive Future Retail’s pact with Amazon as a prudent move in the current retail ecosystem. Risk, however, emanates from regulatory changes, which may derail deal contours as well as Reliance Retail’s aggression," point out Edelweiss’ analysts.

Vishnu Vardhan Reddy, a senior research analyst at Euromonitor International, said: “The development will help Amazon in giving a boost to its online grocery retail segment, which has been its focus recently."

The online retail segment for packaged food and drinks is expected to witness the fastest growth in India at 40% CAGR in 2018-23, according to Euromonitor International.

“Since perishable items are at stake, Future Retail’s stores will help Amazon speed up its delivery timings to the consumer," he added. On the other hand, Future Group can tap into Amazon’s online expertise with this deal.

Including Friday’s fall, Future Retail shares have declined by 13% so far in FY20. Notwithstanding the benefits from the Amazon deal, the consumption slowdown in the economy should keep valuations in check from a near-term perspective.

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