Early Diwali for Future Retail & Shoppers Stop as HyperCity changes hands

Anubhav Sahu & Krishna Karwa

Moneycontrol Research

One of the biggest deals in the retail space got announced with Kishore Biyani’s Future Retail deciding to acquire Shoppers Stop’s HyperCity arm. The transaction value, pegged at Rs 655 crore, will be paid by Future Retail through allotment of shares worth Rs 500 crore to HyperCity’s existing shareholders, in addition to Rs 155 crore in cash.

While the deal value, prima facie, looks muted, Shoppers Stop gets rid of a pain point and can focus on maximizing gains from its relationship with Amazon. For Future Retail, 1.3 million square feet addition (close to 30 percent of Future Retail’s existing area) helps it to augment capacity in one stroke and position its offerings in a premium format, thereby paving the way for a speedier turnaround of beleaguered HyperCity.

Deal contours

In its intimation to BSE, Future Retail laid down the contours of the agreement. The equity aspect includes issue and allotment of 9,310,987 shares (1.9 percent of Future Retail’s share capital) at a price of Rs 535 per share, amounting to Rs 498 crore. HyperCity’s debt, amounting to Rs 265 crore, would be transferred to Future Retail. After making adjustments for cash and cash equivalents, the enterprise value of HyperCity is roughly Rs 916 crore, implying an EV/Sales multiple of 0.79.

While the deal value is at a discount to the valuation of Future Retail (1.57x EV/Sales) and Shoppers Stop (0.98x EV/Sales), as stated in detail in an earlier article, both companies stand to benefit by virtue of this development.

Shoppers Stop gets a clear roadmap

With HyperCity now off its books, Shoppers Stop’s efforts will be solely directed at its forte of retailing home accessories and apparel. Furthermore, the recent tie-up with Amazon will enable Shoppers Stop to enhance its online brand visibility, among the other benefits, as stated in one of our previous reports.

The retail major’s consolidated financials that were negatively impacted by HyperCity’s performance over the years, could witness some relief on back of better EBITDA (a negative EBITDA business segment will no longer be a drag) and bottom-line margins (debt repayment to be effected through proceeds received from sale of HyperCity and investments from Amazon).

Amazon’s hunt for a grocery partner continues

While Amazon succeeded in joining hands with Shoppers Stop to build its brick and mortar store presence across India, it is likely to leverage this relationship in product categories that are closely identified with Shoppers Stop.

Amazon has been scouting for a partner for foraying into food and grocery retailing. It will be interesting to see who fits their bill.

HyperCity could turn out to be the premium/differentiated format for Future Retail

HyperCity’s impetus is clearly greater on metros catering to the upwardly mobile population, whereas Big Bazaar, the flagship brand of Future Retail, is oriented towards the mass affluent category. The product categories and pricing of these two formats are different.

The cash outgo for the deal amounts to only Rs 155 crore. Future Retail can fund this easily from its internal sources without resorting to additional debt.

While it is premature to put a timeline on the turnaround of HyperCity, Biyani has his plans chalked out to make the deal value accretive for the shareholders as early as possible.

The best practices adopted in its existing retail formats would find application in HyperCity as well. Future Retail’s plan is to rename a few HyperCity stores to Big Bazaar Gen Nxt in the immediate future owing to a good brand following in the case of the latter. Secondly, Future Retail aims to actively commence Fashion Big Bazaar sales from the remaining HyperCity stores to cash in on the growth prospects in the value fashion segment.

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