India retail war: A lot at stake in Amazon-Reliance fight over Future

MUMBAI: The war between retail giants — Amazon and Reliance Retail Ltd — is now out in the open, with India’s $635 billion (₹42 lakh crore) retail market worth at stake.
By issuing a statement late Sunday in a dispute it is not a party to, Reliance Industries’ retail unit flexed its muscles and made it clear that it will just not watch the Amazon-Future Group dispute from the sidelines. India’s largest private company has made it clear that it will enforce its rights to complete the transaction with Future group without any delay.

For the world’s most valuable retailer Amazon, it is important that it drags Future Group to court for breaching an international contract so that it does not set a precedent which could be used against it in other countries, said two persons aware of the development. For Reliance Retail Venture (RRVL), a lot hinges on Future Group’s retail asset given its huge ambition in this sector .

“The company has raised nearly ₹38,000 crore from over half a dozen investors and the prospective deal with Future Group must have made Reliance Retail more attractive to investors,” said a person aware of the development. He also said RRVL’s late evening statement could also be aimed at soothing investor confidence.

RIL’s stock price fell 3.9% on Monday to close at ₹2,028.7 a piece on the BSE. “Investors would have considered Future Group’s deal while valuing Reliance Retail because it gives them significant leverage in terms of market share and scale in both fashion and grocery business,” said Abhijit Kundu, vice president, research, consumer and retail, Antique Broking.

The Reliance-Future deal was announced on August 29 and the retail conglomerate started announcing deals ten days later at a pre-money valuation of ₹4.3 lakh crore.

“Anyone who has worked with Reliance knows how thorough they are in legal matters . If the battle escalates, it can go to unchartered territories, including India’s restricted retail FDI norms and the Swadeshi versus Videshi narrative,” said a retail veteran who had worked with Reliance Retail. He also said it is in the best interest of all parties to settle the dispute out of court.

But an industry executive aware of Amazon’s plans said the US company is preparing for a long-drawn battle. “It is a serious matter. If it (Amazon) has come so far, it will only press ahead. It will not buckle, ” he said, adding that Amazon is surprised at RRVL’s statement. “Reliance has no locus standing in the whole thing,” he said.

Amazon and Reliance did not respond to queries.

Currently, Reliance is by far the leader in the physical retail space but has miniscule share in online channels, where both Amazon and Walmart-controlled Flipkart are far ahead.

Goldman Sachs, in an August-dated report said, the Future deal will help Reliance improve competitive positioning. “This acquisition, if completed, would also remove one potential expansion avenue for competitors, especially Amazon and Walmart, who have been looking to bolster their physical presence in retailing in India to strengthen their online business,” it said.

M&A experts feel it is a standard practice in transactions to undertake a detailed due diligence exercise to understand if there is any legal bar or more specifically any outstanding obligations regarding rights of first refusal.
“In case any such obligation is disclosed during the due diligence exercise, it has a direct bearing on the valuation of shares. It is safe to assume that while making an offer for purchase of Future’s shares, Reliance must have taken into consideration a proposed dispute which may arise with Amazon,” said Ashish K Singh, managing partner, Capstone Legal.

Reliance Retail is now valued at more than double the combined market capitalisation of all the listed retailers in the country or about 15% lower than India's biggest consumer products firm Hindustan Unilever.

On Sunday, RIL said it entered into the transaction for acquisition of assets and business of Future Retail under proper legal advice and the rights and obligations are fully enforceable under Indian law.

“Reliance intends to enforce its rights and complete the transaction in terms of the scheme and agreement with Future Group without any delay,” it said in a statement after the Singapore International Arbitration Centre (SIAC) passed an interim order asking Future Group to put its plans of selling its retail business to Reliance on hold and wait for the final judgment on the plea filed by Amazon.