Explained: The tussle between Amazon and Future Group over the Reliance deal

Amazon, on Sunday, won interim relief in Singapore putting on hold the Rs 24,713 crore deal between Future Group and Reliance Industries.
Jeff Bezos Kishore Biyani and Mukesh Ambani
Jeff Bezos Kishore Biyani and Mukesh Ambani

Battlelines have been drawn between the world’s largest online retailer and India’s largest retailer. Amazon, on Sunday, won interim relief in an arbitration it filed in Singapore against the Rs 24,713 crore Future Group and Reliance Retail deal. The Singapore International Arbitration Centre directed Future Group to put its deal with Reliance on hold until it decides on the matter.

With this arbitration, Amazon is essentially taking on Mukesh Ambani and his retail business, which is looking to become the country’s largest retailer by acquiring Kishore Biyani’s retail business.

Reliance is also flexing its muscles, showing no intention of letting the Future Retail deal go. By issuing a late-night statement soon after the interim ruling, Reliance, which isn’t directly involved in the arbitrary proceedings, also showed that it isn’t backing down, and said it intends to enforce its rights to complete the deal. Future Group too, is likely to challenge the interim order passed by SIAC.

But why is Amazon against a deal between Future Group and Reliance Retail? What is in it for Amazon?

Amazon-Future Group connection

In August 2019, Kishore Biyani-led Future Group announced that Amazon picked up a 49% stake in Future Coupons for around Rs 1,400 crore. Future Coupons, which offers value-added payment products and solutions like gift cards, loyalty cards, and reward cards, is the promoter entity of Future Retail and holds 7.3% stake in it. Through this deal, Amazon indirectly got a 3.6% in Future Retail.

Amazon took the indirect route because current FDI (Foreign Direct Investment) norms do not allow Amazon to take a majority stake in Future Retail. However, the deal gave Amazon a ‘call option’, allowing it to buy partial or controlling stake in Future Retail, starting three years from the deal, up to 10 years, subject to prevalent FDI norms.

Later in January 2020, Future Retail also announced a ‘long-term business agreement’ with Amazon India, where Amazon would become the authorized online sales channel for Future Retail’s stores

“This arrangement will allow us to build upon each other’s strengths in the physical and digital space so that customers benefit from the best services, products, assortment and price,” Biyani said at the time.

However, Future Group, which was already seeing mounting debts and widening losses, was hit by the COVID-19 pandemic and the subsequent lockdown. Biyani recently said at an event that the retail major lost around Rs 7,000 crore in revenue in just the first 3-4 months of the pandemic due to stores being forced to stay shut. “The problem is rent doesn't stop, interest (on debt) doesn't stop…We did too many acquisitions in the last six-seven years...I thought there was no other answer but to exit," he said.

As losses mounted, Future Group began to explore a stake sale in its retail and insurance business. After month of negotiation with several players, including Reliance Industries, Samara Capital and Premji Invest, the company in August announced a major restructuring of its businesses where key group companies including Future Retail, Future Lifestyle Fashions, Future Consumer, Future Supply Chains and Future Market Networks will merge into Future Enterprises Limited (FEL).

Enter Reliance

Along with the reorganisation of its businesses, Future Group also announced that it will be selling the retail, wholesale, and logistics business of Future Enterprises to Reliance Retail by way of a slump sale for Rs 24,713 crore. The Future and Reliance Retail deal will add over 1,550 stores including Big Bazaar, FBB, Brand Factory and Foodhall, Easyday, Heritage Fresh and WHSmith to Reliance Retail’s footprint in India.

After this transaction, Future Enterprises said that it would retain the manufacturing and distribution of FMCG goods and integrated fashion sourcing and manufacturing business and its insurance joint ventures.

Post the completion of the deal, Reliance Retail will also hold 13.14% in Future Enterprises.

Reports said at the time Amazon would continue to stay on as a shareholder.

Why is Amazon objecting to this deal?

Despite Amazon being first approached for investment, Amazon sent a legal notice to Future Group over the Reliance deal. Amazon said that it has the first right to pick up a stake in Future Retail because of its stake in Future Coupons. It also reportedly said that the deal violates the non-compete agreement with Future Group, where Amazon listed around 30 companies including Reliance with whom Future Group cannot enter into a share-sale agreement without its consent.

Industry sources told TNM that the legal notice came as a surprise to Future Group since it approached Amazon first for an investment before finalising a deal with Reliance.

“It’s surprising that Amazon has sent a legal notice nearly two months after the deal was announced. Why didn’t they say anything earlier then? There is proof of discussions with them,” the source said.

Amazon then approached the SIAC in Singapore to initiate legal proceedings against the company. During the hearing, Amazon reportedly alleged that the non-compete clause was breached, that its consent wasn’t taken before finalising a deal with Reliance. It reportedly also said that it was willing to bring in investors for Future Group to pare down debt.

The point of contention for Amazon here is likely that with Future Retail’s retail stores, Reliance will become a major competitor for Amazon, which has been aggressively investing in India to expand its presence. Reliance’s e-commerce ambitions through JioMart also would compete directly with Amazon and Flipkart in India.

What happens next?

Future Group and Reliance Retail aren’t backing down. Future Retail, during the hearing, reportedly argued that its deal didn’t breach any contact since Amazon’s deal is with Future Coupons, a separate entity. It argued that the decision was taken by the board of Future Retail, and not just its promoters.

Future Retail said in a statement on Monday that it has been legally advised that its deal with Reliance cannot be held back in arbitration proceedings initiated under an agreement to which Future Retail is not a party.

“As per the advice received by FRL, all relevant agreements are governed by Indian Law and provisions of Indian Arbitration Act for all intents and purposes and this matter raises several fundamental jurisdictional issues which go to the root of the matter,” the company said in a statement.

“Accordingly, this order will have to be tested under the provisions of Indian Arbitration Act in an appropriate forum. In any enforcement proceedings, FRL would take appropriate steps to ensure that the proposed transaction will proceed unhindered without any delay,” the statement added.

However, a lot more seems to be at stake for Future Group in this deal. According to a Reuters report, Future Group argued that if the transaction fails, Future Retail is likely to go into liquidation, putting jobs and livelihoods of over 29,000 employees at risk.

In a similar statement on late Sunday night, Reliance Retail too, stood its ground with regards to the deal and said it entered into a deal with Future Retail under proper legal advice and that its rights and obligations are fully enforceable under Indian Law.

“RRVL intends to enforce its rights and complete the transaction in terms of the scheme and agreement with Future group without any delay,” Reliance Retail said.

As per reports, this temporary relief for Amazon, however, is not reportedly enforceable automatically in India and will need to be ratified by an Indian court. Future Group is now yet to decide its exact course of further action, which will determine which way this fight for dominance over India’s retail market will go.

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