American e-commerce retail giant Amazon has won the initial battle against Future Group. The latter cannot sell its assets to Reliance Retail for the time-being. Amazon claims that Future violated the agreement it had earlier signed with the e-commerce giant, where it was supposed to get the right of first refusal to buy out the beleaguered retailer. But was Amazon really interested in buying out Future Group in totality?
Operational issues had tainted the deal with Amazon right from the day it was signed. A former senior Amazon executive, tells BusinessToday.In that the deal was on the brink of collapse. Amazon picked up a 1.3 per cent stake in Future Retail last year through Future Coupons, in which it bought a 49 per cent stake. "The deal was aimed at building the retail business together. Amazon was to bring in technology and Future supply chain efficiencies and inventory. The stores are to be used as fulfilment centres. The arrangement is facing a host of operational challenges. When the Amazon delivery staff goes to Big Bazaar stores to pick up inventory, they are made to wait at the cash counter as stores prioritise their own customers. The aim was to do over one lakh deliveries a day from Big Bazaar stores but they don't do more than 10,000-15,000," the former executive adds. The US retailer, he says, was happy to exit considering the investment was not reaping fruits.
"Amazon was not interested in investing in Future," confirms a senior partner of a private equity firm. He says that the American retail giant probably felt that it would get cornered by Reliance in the long run. "The whole deal is confusing. Our FDI norms do not allow investment in multi-brand retail. How can Amazon say that it will bail out Future Retail unless it partners with a private equity fund? Also, how could a coupon company give them the first right of refusal," questions the MD of a leading retail brand. Amazon's investment in companies such as Aditya Birla Retail's More was in partnership with Samara Capital.
Both Future Group and Reliance Industries share prices dropped after the news of the deal being put on hold came out. However, stock broker, Arun Kejriwal, says that the dip in the share price of Reliance has nothing to do with the deal being put on hold. "Reliance share prices have been surging extraordinarily for a while and it was due for correction. As far as Kishore Biyani is concerned, he used Amazon to raise money from the market and that didn't work for him," says Kejriwal. "There was news of Biyani being in talks with Amazon before he went to Reliance, but there is something which didn't click," he further adds.
The Amazon-Future deadlock is getting murkier by the day. It could take anywhere between a couple of months to a couple of years to get sorted out. "The fight is going to be between Reliance and Amazon and neither party will give up without a solid fight," says a leading industry retail expert. Meanwhile, Future Group would find it difficult to run the business. It is already defaulting on payments and in the absence of credit worthiness, it would find it difficult to raise working capital.
"Reliance will come to Future's rescue at least in the short-term," predicts Kejriwal. "Future Group investment is a drop in the ocean for Reliance. Even if it means a loss of Rs 200-300 crore, Reliance will support Future at least till end of the year," he further adds.
The former Amazon executive agrees with Kejriwal. "Reliance will step in at the end of the negotiations and find its way out. Even investors would prefer backing Indian companies as they understand the Indian context better," he says.