Finding Fair value of Future Group companies

Finding fair value of Future group companies

Article published as on Thursday, 3^rd September, 2020 at 7:00 a.m.   

On 29/8/20, Future group announced merger of its 5 listed entities into the 6th entity that is

Our aim today (3/9/20) is to  find fair value of future group companies.

Future group announced the following

It will retain following business:

Manufacturing and distribution of FMCG.

Integrated fashion sourcing and manufacturing (apparel business)

And JV in life insurance and JV with NTC mills.

Future group has said that it will sell off four business verticals (retail, wholesale, logistics and warehousing) on a slump sale basis.

Now here assets and liabilities will be taken by reliance retail's subsidiaries.

No detail given at what valuation the sale takes place, so we will assume it to be on book value only.

Reliance retail will also invest 1200 crores for 6.09% stake 

And later 

400 crores (25% paid up) for 7.09% stake valuing future enterprise on lower and upper end at 

19704 crores and 22695 crores respectively.

Let’s calculate the fair value 

Here is the swap ratio

FOR 10 shares of Future Retail: FEL will issue 101 shares

FOR 10 shares held in Future Consumer (face value of 6 rupees): FEL will issue 9 shares

FOR 10 shares of future lifestyle (FLFL): 116 shares of FEL will be issued.

FOR 10 shares of future supply chain holdings: 131 shares of FEL

FOR 10 shares of future market (FMNL): 18 shares of FEL.

Let’s see the existing shares, shares after conversion and net worth of each of business.

(In the image you can find out detailed calculation: figures taken using FY19 annual reports)

Now after merger the combined outstanding shares and net worth 

Future enterprise:        1005.11 crore shares

Net worth:                              11429.24 crores rupees

Estimated book value   : 11.22 to 12.98 rupees per share (estimated*)

(* :Book value is estimated based on the assumption that asset sale is being done on book value, any further news on valuation could impact book value)

Now with these shares finding their fair value using reliance retail’s investment as benchmark.

(So 19704 x (100-6.09) % which gives 18504 crores) 

If we divide the shares by market cap we get 

18.17 rupees (1200 crores for 6.09%)

And now for second transaction

(22695 crores x (100 – 7.05) % = 21095 crores/ 18504 crores = 1.14 times

Now multiplying 1.14 times by 18.17 rupees gives 20.71 rupees)

The value of share comes to around 

20.71 rupees (1600 crores for 7.05%)

Thus we can say that the fair value of Future enterprise after the merger is between 18 to 21 rupees!

Now using this price and swap ratio we can reverse construct the fair value of each share.

(I have also compared Current market price 2/9/20 and its discount premium to lower end of valuation)

Future retail:                     181.80 to 212.10 rupees

CMP: 131.50                           Discount of 27.66%

Future Supply chain:      235.80 to 275.10 rupees

CMP: 158.20                          Discount of 32.65%

Future lifestyle:                208.80 to 243.60 rupees

CMP: 141.75                           Discount of 32.11%

Future consumer:             16.20 to 18.90 rupees

CMP:          12.02                             Discount of 25.80%

Future market:                  28.80 to 33.60 rupees

CMP: 27.05                            Discount of 6.07%

Future enterprise:           18 to 21 rupees

CMP: 19.15                              Premium of 6.38%

With this we can at least get some clarity on what shall be the value of future group shares.

Obviously as we can see future enterprise shareholders are at disadvantage, and all other group companies shareholder enjoy a better conversion rates.

Also the book value is expected to drop to levels of 11.22 rupees to 12.98 rupees per share from the current level of 86.84 rupees (standalone) and 93.74 rupees (consolidated) per share in the future enterprise ltd.

Final comments:

In my personal opinion whatever is done is best for lenders and depositors of future group, but for shareholder it does not seem the best as of now.

Anyways shareholder of future enterprise ltd can sell their shares (whenever it comes out of circuit) and transfer to future supply chain or future lifestyle thus getting more shares for the same amount.

Shareholder of future enterprise  should give a serious thought to this arbitrage opportunity as it is almost risk free gain to them.

[UPDATE AS ON 8/10/20]

An article stating that amazon has filed for arbitration in Singapore against Future group has popped up. This means a challenge for future group to carry on with the deal this is a roadblock.

 

Amazon has filled arbitration (from the point of view of shareholder), the implications of this would be borne by other shareholders, depositors and debt holders as well, already after the announcement of the deal, several future group companies have defaulted on their debt obligations and their debt instruments are now rated ‘D’.

 

What should FD depositors do now?

It’s better to withdraw your FD even at penalty if you have the option to, as there is high level of uncertainty regarding the merger and reliance deal with future group.

 

What should shareholder do now?

Don’t average,

If the deal goes through and everything is fine then shareholders would get their capital returned

If things don’t go as planned, the future group could land at IBC and the further capital invested would also get wiped out. So it’s better to hold your existing position and not average.

(Disclosure: the calculations are made on publicly available data as on 2/8/20, and it provides fair value in best form by benchmarking investment of reliance retail.

In future after certain clarification and more details of the deal the market may assign a higher or lower fair value to all these stock)

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