Relevant Documents:Scheme of arrangementValuation ReportAudit Committee ReportFairness Opinion ReportFinancial Summary of past 3 yearsCompliance Report
The composite scheme of arrangement released by Future Retail on its website yesterday includes transfer of liabilities aggregating INR 190.6 billion ($2.59 billion) as part of $3.4 billion-equivalent deal with subsidiaries of Reliance Industries.
The aggregate liabilities of INR 190.6 billion is split between Logistics and Warehousing for INR 6.758 billion and Retail and Wholesale for INR 183.834 billion, according to the scheme of arrangement.
Borrowings worth INR 126.12 billion, including Future Retail’s $500 million 5.60% senior secured notes due 2025 to be transferred at par to Reliance, according to the scheme of arrangement.
The composite scheme of arrangement includes transfer of Future Group’s companies including listed companies, Future Retail, Future Consumer Ltd., Future Lifestyle Fashions Ltd., Future Supply Chain Solutions Ltd. and Future Market Networks, that will be merged into Future Enterprises Ltd. (FEL), which will be acquired for $3.4 billion-equivalent by Reliance Industries, as reported
The logistics & warehousing undertaking from FEL will be transferred by Reliance Retail Ventures Ltd. (RRVL), a subsidiary of Reliance Industries and while the retail & wholesale undertaking will be transferred to RRVL’s wholly-owned subsidiary Reliance Retail and Fashion Lifestyle Ltd. (RRFLL), as a going concern on a slump sale basis, as further reported.
Share capital structure (in INR Million) of the transferor companies as of July 31 is shown below
The assets and liabilities of promoter company of Future Retail, Future Coupons Pvt Ltd, of which Amazon is the shareholder, doesn’t appear to be part of the Scheme of Arrangement. Similarly, the assets and liabilities of the ultimate parent of Future Coupons, Future Corporate Resources Pvt Ltd, is also not part of the Scheme of Arrangement either. Future Corporate Resources Pvt Ltd’ subsidiary had defaulted on the NCDs earlier this year as reported
The scheme of arrangement includes a non-compete clause of 15 years, restricting the promoters of Future Group from engaging in the retail & wholesale and logistics & warehousing business in “India or elsewhere.”Liabilities
As part of the deal, the liabilities related to the logistics and warehousing business aggregating INR 6.76 billion shall exclude all other liabilities including:
- any and all borrowings relating to the Logistics & Warehousing Business availed on and from April 1, 2020
- any interest accrued on the borrowings relating to the Logistics & Warehousing Business on and for the period commencing from April 1, 2020
- any new creditors for supply of goods or services
- any increase in the amount payable to any of the Persons specified in Schedule I (mentioned below)
- on consummation and coming into effect of this Scheme, the amount payable by RRVL to any Person whose name appears in Schedule I hereto shall not exceed the corresponding amounts specified against their name in Schedule I.
- In the event that the transferred logistics & warehousing Liabilities is lesser than INR 6.76 billion on account of repayment to any of the Persons whose name appears in Schedule I against the amounts due to them, then and in such a case the difference between INR 6.76 billion and the actual transferred logistics & warehousing liabilities shall be paid in cash by RRVL to FEL
- Further, the transferred logistics & warehousing liabilities shall not include any contingent liability, whether disclosed or undisclosed and such contingent liability shall continue to be part of residual liabilities and will be met by FEL in case the liability materialises
The liabilities relatable to the retail & wholesale business aggregating to INR 183.83 billion shall exclude all other liabilities including:
- any and all borrowings relating to the Retail & Wholesale Business availed on and from April 1, 2020;
- any interest accrued on the borrowings relating to the Retail & Wholesale Business on and for the period commencing from April 1, 2020;
- any new creditors for supply of goods or services;
- any increase in the amount payable to any of the persons specified in Schedule IV hereto.
- On consummation and coming into effect of this Scheme, the amount payable by RRFLL to any person whose name appears in Schedule IV (mentioned below) shall not exceed the corresponding amounts specified against their name.
- In the event that the Transferred Retail & Wholesale Liabilities is lesser than INR 183.83 billion on account of repayment against the amounts due to them, then and in such a case the difference between 183.83 billion and the actual transferred retail & wholesale Liabilities shall be paid in cash by RRFLL to FEL
- The transferred retail & wholesale liabilities shall not include any contingent liability, whether disclosed or undisclosed and such contingent liability shall continue to be part of Residual Liabilities and will be met by FEL in case the liability materialises
Remaining undertaking of debt by FEL includes trade payables, lease liabilities and borrowings totalling INR 152.61 billion, per Scheme of Arrangement. Adjusting for cash on the balance sheet, Net debt would be INR 83.09 billion, per Scheme of Arrangement.
According to the Scheme of Arrangement, Remaining Undertaking of FEL is defined as follows:
“Remaining Undertaking of FEL” means all of the businesses, units, divisions, undertakings, and assets, investments & joint ventures, Permits and contracts of FEL, in relation to the Remaining Business of FEL and other assets and liabilities, including the Residual Liabilities, as specifically set out in Schedule III hereto. For avoidance of doubt, it is clarified that other than 12 of 471 the Remaining Undertaking of FEL, all the other businesses, units, divisions, undertakings and assets, of FEL, but no liabilities thereof other than Transferred Logistics & Warehousing Liabilities and Transferred Retail & Wholesale Liabilities, immediately upon the effectiveness of Part III of this Scheme, will form part of the Logistics & Warehousing Undertaking or the Retail & Wholesale Undertaking, as the case may be.”
Remaining undertaking of FEL including residual liabilities according to the scheme of arrangement:
Retail and wholesale business borrowings are as follows:
On the question of where will the 5.6% $500 million Sr. Secured Bond due 2025 ultimately resides, the Scheme of Arrangement doesn’t explicitly provide any outline.
Since the retail and wholesale assets would be housed under RRFLL, per the Scheme of Arrangement, the dollar bond could eventually form part of its balance sheet liability, per Reorg. RRFLL is a step down subsidiary of Reliance Industries. If the dollar bond is not provided with a guarantee from the ultimate parent, Reliance Industries, or some sort of Keepwell from RRVL, we assume that the dollar bond held by RRFLL could be structurally subordinated to the secured creditors of Reliance Industries or maybe even to RRVL’s.
However, they may rank pari passu with the secured debt of RRFLL. The rating agencies could assign a lower than expected rating on the dollar bond vis-a-vis other international rated debt of Reliance Industries, per Reorg. Reliance Industries’ foreign currency debt is rated Baa2 negative by Moody's and BBB+ stable by S&P, according to Cbonds.
Details of logistics and warehousing business borrowings is as follow:
According to the Scheme of Arrangement, ‘upon effectiveness of Part III, Part IV and Part V of this Scheme and after the allotment of the Transferee Company New Equity Shares pursuant to Part III of this Scheme’, the Reliance Group proposes to acquire a minority interest in the Remaining Business
, which will be carried on by the Transferee Company.
Scheme of Arrangement shows issuance and allotment of 67.9 Preferential Equity Shares and 90.6 Preferential Warrants by FEL to the Reliance Group upon which the latter will hold an aggregate of 13.14% of the total expanded issued and paid-up equity share capital of FEL. The issue price per Preferential Securities will be done at INR 17.65 per share.
According to the Scheme of Arrangement the Remaining Business is defined as follows:
“Remaining Business of FEL” means the business of FEL in relation to manufacturing (including through contract manufacturing) and processing of fast moving consumer goods products, processed food, and apparels and their distribution to third-party wholesalers and retailers (other than through online or physical stores), investments of FEL in the entities as specifically listed in Schedule III and FEL’s interests in the immoveable & moveable properties/assets as specifically listed in Schedule III hereto.’Valuations
Valuation for retail and wholesale business as per the scheme of arrangement is as follows:
Valuation for logistics and warehousing business as per the scheme of arrangement is as follows:
Read Reorg’s coverage of Future Retail HERE
; a Future Retail Tear Sheet is HERE