E-commerce giant Amazon is picking up an indirect stake in Future Retail Ltd, which runs hypermarket chain Big Bazaar and other formats, adding to its string of partnerships with various local retailers as the online marketplace braces up for a tough fight with global rival Walmart.
Future Retail said on Thursday that Amazon has inked a deal to buy almost half or 49% of one of its promoter holding entities, Future Coupons Ltd, with an option to acquire the entire stake in the future.
It didn’t specify the deal value. However, the current market value of the 3.5% beneficial interest that Amazon would gain in Future Retail is worth Rs 744 crore ($105 million), according to VCCircle estimates.
Future Coupons currently does not own a stake in Future Retail but had recently subscribed to convertible warrants for Rs 2,000 crore ($280 million), which would give it an estimated 7.3% stake in the group flagship by next year.
Given the strategic importance of the deal for Amazon, it is unlikely that retail king Kishore Biyani would have agreed to seal a deal at a lower valuation than what he himself paid to up holding in the flagship company. So the deal is likely to be closer to Rs 1,000 crore ($140 million), if not more.
Future Retail share price skid 5.6% to end the day at Rs 390 a piece, in a strong Mumbai market on Friday. The firm counts PremjiInvest and media house BCCL, the firm behind publications like The Times of India and The Economic Times, as key shareholders. BCCL is the single largest non promoter shareholder with over 7% stake.
More significantly, Amazon has the right to buy out the entire stake held by Future Coupons in Future Retail in the future.
Amazon has a ‘call’ option to buy the entire holding in Future Coupons between 2022 and 2029, it said. At the same time, Biyani has agreed to certain binding agreements over the sale of the 51% stake in Future Coupons, where it can’t be sold to some specified but undisclosed buyers. Amazon has the first right of refusal on this remaining stake.
This puts a significant rider dissuading global rival Walmart to pick up Biyani’s stake in Future Retail. Walmart had last year paid top dollar to get a leg-up on Amazon by acquiring India’s top home-grown e-commerce firm Flipkart. Walmart didn’t own a consumer-facing retail chain in India due to India’s restrictive norms related to multi-brand retail sector. But it has large wholesale stores meant for selling to smaller retailers. The Flipkart deal pitted it directly against Amazon.
Amazon is locked in a three-pronged pitched battle with Walmart and Mukesh Ambani’s Reliance Retail to carve out a bigger slice of India’s retail pie. Reliance Retail already is the largest physical retailer in the country by revenues and has been slowly building capability to push in the digital arena.
Meanwhile, for Amazon this is the second key deal in India. Previously, it had partnered private equity firm Samara Capital to buy supermarket chain More from the Birlas. Prior to that, it had picked up a small strategic interest in department store chain Shopper’s Stop.
Amazon already has a partnership with Future Retail and Big Bazaar is one of the two vendors on its grocery delivery service Prime Now. This deal may extend this to other categories for Amazon's flagship e-commerce play in India.
For Biyani, who has long been wary of the discounting model of e-commerce firms, this adds a path to a bigger digital playbook. In the past, the Future Group has tried and failed to make any serious dent with a business model that intended to leverage the power of omni-channel retailing without deep discounts. This was seen as critical because Reliance Retail took over the baton of the largest retailer in the country from Future Group through organic growth. Biyani's strategic inorganic moves with Bharti Group's Easyday and a few e-commerce players such as FabFurnish were not enough to stop the juggernaut of Mukesh Ambani.
With foreign retailers not too keen on playing second fiddle to local partners in India to comply with restrictive investment norms, Biyani did not have too many options to pump-prime for the future. Indeed, the only large foreign retailer that bit the bullet was Tesco, which picked Tata Group as a partner for its play in India via Trent. Biyani had also inked an agreement with Paytm to take Big Bazaar online.
Indeed, Big Bazaar is one of the large institutional vendors on Paytm Mall. But with Paytm Mall itself struggling, it is to be seen how Biyani balances his strategy between Alibaba-backed Paytm Mall and the new-found love with Amazon in the future.