Investors should have been overjoyed when Future Retail Ltd finally announced its deal with Amazon. For many months now, news reports were abuzz about the company’s deal with the American 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 declined by 4.6% on the National Stock Exchange.
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’s press release offers no insight on the deal value.
“We arrive at an implied acquisition price of ₹773, a 53.2% premium to the warrant conversion price," said analysts from 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, analyst, Systematix Shares and Stocks (India) Ltd, even as the deal is positive, the quantum of the 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," added Nayyar.
Still, Amazon has a call option where it can acquire all or part of the promoters' shareholding in Future Retail between 3-10 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, senior research analyst at Euromonitor International, “The development will help Amazon in giving a boost to its online grocery retail segment, which has been its focus recently."
The packaged food & drinks online retail segment is expected to be one of the fastest-growing segments in India and is expected to grow 40% CAGR in 2018-23, as per Euromonitor International.
“Since perishable items are at stake, Future Retail’s stores will help Amazon speed up its delivery timings to the consumer," added Reddy. On the other hand, Future Group can tap into Amazon’s online expertise with this deal.
As such, the deal reinforces Amazon’s confidence in the vast potential of the Indian retail market.
Including Friday’s fall, Future Retail shares have declined by 13% so far this financial year. 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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