Reliance's Acquisition of Future Group to Strengthen Its Retail Footprint: Moody's

Reliance Industries Ltd's acquisition of Future Group's consumer business will strengthen the retail footprint of India's largest organised retailer, Moody's Investors Service said on Wednesday. Last week, RIL announced that it will acquire Future Enterprise Limited's (FEL) consumer business for a purchase consideration of around Rs 24,713 crore.

"The transaction is credit positive because it will solidify its (RIL's) position as the largest organised retailer in India and further diversify its earnings," the rating agency said in a note. Moody's said despite a price tag of around USD 3.3 billion, the cost of the acquisition remains small relative toRIL's total assets of around USD 155 billion and consolidated EBITDA of USD 12.8 billion for the fiscal ended March 31, 2020.

"As a result, the acquisition can be accommodated within RIL's current rating," it said. "Moreover, the company's recent spate of asset monetisation and equity fundraising activities have created sufficient buffer within its credit metrics." The oil-to-telecom conglomerate will acquire Future's retail, wholesale, logistics and warehousing units to help almost double its footprint. "The acquisition will strengthen RIL's position within the organised retail sector in India as it will be able to leverage on established brand names and vast network of stores currently owned and operated by the Future Group entities," Moody's said.

In addition, the acquisition will also allow RIL to step-up its retail footprint in states and territories where it currently does not have a significant presence. "Even though entities in the Future Group are under financial stress, we do not expect RIL to be impacted given that RIL is only buying the assets and businesses," it said.

Successful completion and integration of the assets proposed to be acquired will create business and financial synergies, it said, adding the extent of synergies will depend on RIL's retail business strategy and how quickly the consumer demand in India recover following the unprecedented economic contraction due to coronavirus. Compared to the purchase consideration of USD 3.3 billion and reported net debt of USD 21.5 billion as of March 31, 2020, RIL has raised around USD 23 billion since April 2020 by way of monetising stakes in its digital unit Jio Platforms Ltd, selling a 49 per cent stake in the fuel retailing business to BP Plc and the first tranche of the proceeds through its rights issue offering.

"We expect the company to raise at least USD 8-10 billion over the next few months as it concludes the sale of its tower assets to Brookfield Asset Management and receives the balance proceeds from the rights issue offering," Moody's said. RIL, it said, will be able to maintain its net debt-free status even after considering the cash outflow and increase in borrowings following the completion of the proposed acquisition.

"Notwithstanding the improvement in RIL's business profile, the proposed acquisition will also increase the company's dependence on the Indian economy as a source of revenue. "This reiterates our view that RIL cannot be rated more than one notch above the Indian sovereign," the rating agency said.

As part of the Rs 24,713 crore deal, RIL through its wholly-owned subsidiary Reliance Retail Ventures Ltd (RRVL) will acquire the grocery, apparel and supply chain businesses of the Future Group. These businesses are currently housed under separate listed subsidiaries which will be merged into FEL before being transferred to RIL.

Post the transfer, FEL will retain the manufacturing and distribution of fast-moving consumer goods (FMCG), sourcing and manufacturing of apparels, and its insurance joint ventures. The transaction remains subject to various shareholder and regulatory approvals and is expected to close over the next 6-12 months, Moody's said.