How Ambani’s $3.2-billion retail deal was scuttled by a creditor revolt

According to people familiar with the matter, the preferential treatment of bondholders enraged Indian banks to the point where they rejected a $3.2 billion rescue deal from one of Asia’s wealthiest men for a debt-ridden, unprofitable retail chain.

Offshore bondholders – a relatively small portion of Future Retail Ltd’s creditor pool – were promised full payment, while local lenders were asked to take a haircut, the people said, speaking on condition of anonymity because they were discussing confidential information. Secured Indian lenders were promised recoveries of between 34% and 88% of the total $4 billion in debt, the people said, and even those payouts were staggered over seven years.

The move was precipitated by the fact that local banks rejected the billionaire Mukesh Ambani-led conglomerate’s offer, effectively derailing what would have been India’s largest retail acquisition. Reliance Industries Ltd announced the purchase plan in August 2020 but faced legal challenges from Inc, which argued it contractually had the first right of refusal.

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Bank of India and State Bank of India, Future Retail’s primary lenders, did not immediately respond to emails seeking comment on the deal’s rejection. Future Group and Reliance representatives did not immediately respond to requests for comment.

State-run lenders said they risked federal agency investigations if they accepted these discriminatory terms, which explains their current preference for a court-mediated insolvency process in which bids are solicited and they are not accused of cutting a bad deal. The Bank of India has already requested that the process be initiated by an Indian court.

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A shrewd choice

Indian banks’ hard-nosed decision has pushed the precarious Future Retail, which operated one of the country’s largest retail grocery chains prior to the pandemic, one step closer to bankruptcy. It has also taken the wind out of the two-year-old litigation between Reliance and Jeff Bezos’s Amazon – the e-tailer had initiated arbitration proceedings in Singapore to block the deal – but left the door open for Ambani to acquire these retail assets through the bankruptcy process, possibly at a lower price.

Mukesh Ambani
Mukesh Ambani

“Reliance and other parties may be eligible to bid for its assets by submitting resolution plans,” according to Satwinder Singh, a partner at law firm Vaish Associates Advocates in New Delhi. “As a result, any or all pending arbitration proceedings against Future would be halted.”

While local lenders initially approved of the deal when it was announced, the people said, a lot has changed in the last year or so. While the Amazon lawsuit dragged on, the asset value continued to erode, and the pandemic exacerbated Future Retail’s cash crunch, which resulted in the company defaulting on debt repayments.

Coup without bloodshed

Reliance dealt a fatal blow to Kishore Biyani’s Future Group in February, when it quietly began poaching employees and acquiring rental leases on hundreds of stores previously operated by Future Retail and Future Lifestyle Fashions Ltd. Amazon suggested settlement talks on the bitter dispute following Ambani’s bloodless coup, alarmed Future’s investors and lenders concerned about asset stripping.

The companies informed India’s top court on March 15 that the out-of-court truce talks between Amazon, Future, and Reliance collapsed shortly after they were initiated.

“A watershed moment occurred when Reliance physically took over Future’s stores, transforming the situation into a no-holds-barred situation,” said Devangshu Dutta, head of retail consultancy Third Eyesight in New Delhi. “Previously, the conflict was fought in courts and at the negotiating table. However, at this point, it shifted to the real business.”

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