After taking over four regional retail brands (Bharat Retail and Big Apple in north India, Heritage Fresh and Nilgiris in south India) to strengthen its store network in the past, the Kishore Biyani-led conglomerate Future Group has set its eyes on the prospect of acquiring Hypercity.
After taking over four regional retail brands (Bharat Retail and Big Apple in north India, Heritage Fresh and Nilgiris in south India) to strengthen its store network in the past, the Kishore Biyani-led conglomerate Future Group has set its eyes on the prospect of acquiring Hypercity.
About Hypercity
Hypercity, a subsidiary of Shoppers Stop (also co-owned by K Raheja Corp), is one of India’s most renowned supermarket retail brands. Its 19 big-box format stores span marquee locations of Mumbai, Hyderabad, and Bengaluru, Bhopal, Ludhiana, Amritsar, Jaipur, Pune, Ahmedabad, Delhi, and Noida. It derives roughly 60/20/20 percent of its revenue from food items/garments/home furniture, respectively.
About Big Bazaar
‘Big Bazaar’, FRL’s flagship brand, is India's largest organised store-based retail market, with nearly 20-25 percent market share. The brand’s 253 outlets are spread across 127 cities in 26 states of India (as on June 30, 2017).
How does Future Retail benefit?
With Hypercity next on the checklist, FRL aims to leverage on its retail capabilities (by adding about 1.4 million square feet of retail space to its existing 13.8 million square feet area), building economies of scale, reducing overall cost of operations, expanding the number of small/convenience outlets (especially in the metros), and pushing the sales of its margin-accretive private label consumer products.
Moreover, the company is likely to shift its product mix in favour of apparel, especially on the value fashion front, to boost margins. Since there will be no gestation period on the Hypercity stores (which are fully functional at the moment and may not require any major capex), benefits of the arrangement will start accruing to the company’s turnover almost immediately. How things pan out at the operating and bottom-line levels solely depend on how optimally the company manages to sweat the new assets under its purview post-acquisition.
Furthermore, the company’s aggressive consolidation strategy is directed at competing with efficient players of the likes of D-Mart (operated by Avenue Supermarts), one of the bigger players in western India.
Future Group is targeting an ambitious turnover of approximately Rs 1 lakh crore by FY21 end. Inorganic strategies lie at the heart of this target.
Shoppers Stop stands to gain as well
Though the contours of the deal are far from final, prima facie, it appears to be a good deal for Shoppers Stop, too, as it gets rid of one of its loss- making businesses. This should enable Shoppers Stop to focus on its core retail business segments (clothing, merchandise, accessories, cosmetics) that should be margin-accretive in the medium to long term.
As is evident from the financials, Shoppers Stop should definitely witness an improvement in financials should they succeed in selling the loss- making division of Hypercity.
What will the transaction value be?
The valuation is largely a function of the financial parameters. Given the rather subdued operating matrix of Hypercity, it is unlikely that Shoppers Stop would command a premium for this entity. We expect the deal to be valued close to 0.7x FY17 revenue that translates to a valuation of close to Rs 974 crore. However, the exact contours of the deal in terms of payment of consideration by Future Retail to Shoppers Stop (by way of cash disbursements, taking Hypercity’s debt on its books, allotment of shares in Future Retail to Hypercity shareholders, or a combination of the three), remain to be seen.
Source - moneycontrol.com
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