Indian grocery chain Future Retail Ltd. extended its five-day rising streak after announcing a merger with billionaire Sunil Mittal’s Bharti Retail Pvt. to reduce costs and get cheaper loans.
Two companies will be formed as a result of the merger, Future said in a statement yesterday. Future Retail will hold the combined store operations, comprising of 570 stores across India. Future Enterprises Ltd. will own the infrastructure and investment assets of both companies. The two new entities will be run by a committee, Future Group Vice Chairman Kishore Biyani said.
Indian retail chains have changed store formats, shrunk hypermarkets and shut hundreds of outlets as high real estate costs and weak demand have eroded profits. Food retailers, among the worst hit because margins tend to be lower, had accumulated losses of 130 billion rupees ($2 billion) in the year ending March 2014, or 40 percent of their revenues, credit assessor Crisil Ltd. said in a report last year.
“There is a very limited amount of overlap between the two companies’ networks, so this merger is a good way to grow,” Arvind Singhal, chairman at consultant Technopak Advisors Pvt., said in an interview. “The joint entity will be better placed to raise capital,” which is needed for expansion in India’s under-penetrated grocery market, he said.
Future Retail shares rose 2.3 percent to 132.4 rupees as of 10:18 a.m in Mumbai trading. The shares have gained 26 percent so far this year, outperforming the benchmark S&P BSE Sensex which fell 0.1 percent.
Future Group, which controls three listed entities, has a combined 17 million square feet (1.6 million square meters) of retail space across supermarkets, apparel outlets and electronics stores. Bharti Retail, a unit of Mittal’s holding company Bharti Enterprises Pvt., was earlier Wal-Mart Stores Inc.’s partner in India.
Despite challenges, food retailing is attractive to retail chains as the share of organized players “is a minuscule 2.3 percent,” Crisil, the Indian arm of Standard & Poor’s, said.
The merged entity will focus on small stores and plans to have 500 outlets each in the cities of Mumbai and Delhi, Biyani said, without giving a timeframe.
Bharti will own as much as 15 percent stake in each of the two entities, Vice Chairman Rajan Mittal said.