The Big Future Group Sale -

A CASE STUDY

ITs not about whats the right thing to do. Its about whats the first thing you can do.
Nobody had looked Kishore Biyani in the eye before and told him that. But Sameer Sain, the
founder of Everstone Capital, had to do it. His words made Biyani squirm. Its not the kind of
thing you tell a man whos demonstrated to the world you can build an empire worth $2.5
billion (Rs 13,800 crore) in 15 years. But that said, his debts were in the region of a back
breaking

Rs

9,000

crore,

roughly

$1.66

billion

at

todays

exchange

rates.

Biyani knew it was the kind of number which could swamp all the Future Group companies he
had meticulously built over the years to earn himself the title of Indias Retail King. To rid
himself of the burden, he was negotiating with prospective lenders and suitors of all kinds. But
Biyanis problem was this: How do you make a considered decision when youre running out
of time? More importantly, how do you know what is the right thing and what can possibly go
awry?
Biyani and Sain had known each other for a long time. When Biyani was starting out, Sains
father was one of his most trusted partners. That is how, when he was just 18, Sain got to intern
at Pantaloon, one of Biyanis earliest ventures. He recalls those times in the mid-90s when
Biyani placed him at his trouser manufacturing facility in a run-down part of Andheri, a
Mumbai suburb, to iron trousers with three pleats. Sain was pretty damn sure the trousers
would bomb. Another matter altogether that the trousers went on to become a rage and he got a
glimpse

of

Biyanis

genius.

The

man

knew

what

the

market

wanted.

And then, in 1997, Pantaloon made its retail debut with a store in Kolkata that catered to men.
It was the start of Biyanis incredible run. On Sains part, soon after his internship was done,
he went off to the US to pursue a degree in finance and ended up at Goldman Sachs. But he

stayed in touch with Biyani and they bounced ideas off each other regularly.
In 2007, when Biyani thought up of creating a financial services firm that could piggyback on
his fast-growing retail empire, he asked Sain to come back and set up Future Capital Holdings
(FCH). Three years later, after an acrimonious parting, Sain took the investment banking and
private

equity

portfolios

of

FCH

to

set

up

Everstone

Capital.

But it didnt stop Biyani from calling up Sain for advice. When you have people out to kill
you, you dont wait to think what the best move to strike back probably is, Sain told him.
On April 30, this year, four weeks after his chat with Sain, Biyani made a move no one
expected of him. He agreed to hand over majority control of Pantaloon, his department store
chain to Kumar Mangalam Birla, chairman of the Aditya Birla group. It helped that Birla was a
fellow Marwari. Biyani retained a 25 percent stake for himself. And then three weeks later,
Biyani sold his majority stake in FCH to Warburg Pincus, the blue-blooded private equity firm.
These two transactionsalong with a few others in the pipelineought to help Biyani halve
his

debt

and

move

to

safer

harbour.

What nobody is clear about though is the endgame. With debt out of the way, will the maverick
think up something dramatic as he had 15 years ago? Or will he simply ride away into the
sunset by selling his stakes to a global retailer at a fancy valuation? The latter has been the
subject of intense speculation since 2001 when he thought up Big Bazaarthe Indian version
(or

Biyani-version,

if

you

will)

of

hypermarket.

What we know is this: The endgame will be around what he does with Big Bazaar. It
contributes to half of the groups turnover and is his crown jewel. But after taking in Sains
advice and doing the unthinkable by giving up stakes in Pantaloon and FCH, hes earned some
breathing space. Trying to second guess him though is a bit like watching S Sreesanth run in to
bowl.

Nobody

has

clue

where

hell

pitch

the

next

ball.

Beginning

of

the

end

How does an entrepreneur obsessed with growth live in a world where interest rates are on the
rise, the economys slowing down and the balance sheet is stretched? The most obvious thing
to do is curb the appetite to grow. But thats awfully difficult he admits. It is like a snake
shedding

skin,

says

Biyani.

Two people helped him take the call. The first was Ashni, his elder daughter, whose judgement
he trusts. The second was Anil Agarwal, chairman of Vedanta. Agarwals nephew Viraj
Didwania married Ashni a couple of years ago. Biyani says he learnt from Agarwals sense of
detachment. But it is never easy to question all that youve done, and turn out a new leaf
overnight,

Biyani

explains.

After much brainstorming with them, Biyani decided to put everything on the table. This
March, he called in all of his key lieutenants and announced a war on debt. It was pretty clear
we had to put all the rods in the fire and depending on the outcomes, wed figure out how to
move forward, says Damodar Mall, director of food strategy at Future Group. Biyani was to
lead the charge aided by his cousin Rakesh Biyani, Mall and Anshuman Singh, CEO of Future
Logistics.
The plan to sell FCH was set in motion sometime last June. V Vaidyanathan, or Vaidi as the
CEO of FCH is popular known as, got to know of that on television when Biyani described
FCH as a non core asset. He was just in his 10th month at the company and had joined after
being relentlessly wooed by Biyani to walk out of his job at ICICI Prudential. Vaidi bit the bait
when he was offered a 10 percent stake in the venture and the challenge of creating a new.
All Vaidi could do was shrug his shoulders, gather his wits and start looking for a new strategic
investor in place of Future Group. The mandate was given to Morgan Stanley. But the problem
was, FCH didnt have a business model. Vaidi had just about managed to rebuild the top team.
Private equity firms like Baring and Bain Capital considered the proposition as did the Southbased Deccan Chronicle group. But fact was, the Pantaloon stock was underperforming the
market, its book was full of debt and Biyani was in a tearing hurry to get.

Luckily for Vaidi, while on a flight to Mumbai, he got talking to his co-passenger. He turned
out to be Narendra Ostawal, a principal at Warburg Pincus. Three months later, Warburg
Pincus decided to buy into FCH. The deal reduced Biyanis debt by Rs 500 crore ($90 million).
Even as all this was happening, Biyani reached out to Vishal Kampani of investment bank JM
Financial six months ago. He wanted to leverage Kampanis relationship with Kumar Birla to
hammer a supply chain relationship with the latters Madura Garments. Biyani argued the two
businesses could benefit a lot if Maduras strengths in mens wear could be combined.
When I started to get to know the two businesses better, I could see he [Biyani] would have
to sell something big, says Kampani. As things turned out, Birlas strategy team, led by Dev
Bhattacharya, had figured as well that if Biyani had to get out of the hole he was in, hed have
So, late in March this year, Kampani told Biyani, the Birlas would be interested, but only if
they could acquire a controlling stake in Pantaloon. Biyani was taken aback. It took Kampani
three one-on-one meetings with Biyani to persuade him to even consider the deal. Eventually,
Kumar Birla had to step in. After three rounds of closed door meetings and persuasion on part
of Kampani to up the Birla offer, a deal was struck. It helped Biyani offload Rs 1,600 crore
($288 million) of debt and retain a 25 percent stake in the demerged entity.
What eventually caught Biyanis eyes were the numbers. In two years, the value of the 25
percent in the demerged entity will perhaps be worth much more than when it was part of the
holding company Pantaloon Retail India Ltd (PRIL), says Biyani. By combining the two
retail chains, Kampani says he expects a margin boost of at least 2-3 percent from rentals
alone.

This month, Biyani says he is likely to exercise a put option in his joint venture with Staples
that will bring him Rs 200 crore. He plans to also exit his insurance joint venture with Italys

Generalii. And it could be tough for Biyani to get a buyer to cough up the Rs 1,000 crore ($180
million) that he expects from his stake sale. If all of these go to plan, Biyani would have
halved

his

debt

across

the

group

to

Rs

3,800

crore

($684

million).

The single-minded determination with which Biyani has pursued the war on debt has caught
many by surprise. Yet those who know him for long say that he revels in such tough situations
and it usually brings out the underdog in him. Kishore has a remarkable quality of
passionately pursuing an ideaand when that doesnt work, he knows how to walk away from
it, says Madhav Bhatkuly, who was among the first investors to spot Biyanis entrepreneurial
flair

in

2003

before

selling

out

at

significant

multiple

in

2007.

His entrepreneurial flair and instinct helped Biyani experiment with different retail formats and
junk them as easily whenever it didnt work. But the model works only when theres liquidity
in the markets and raising capital is easynot in the kind of world we live in now.
Privately though, Biyani has confided in at least two institutional investors that hes prepared
to sell everything, provided he gets full value. While his debt may have gone down, he
knows there isnt much he can do without additional capital. That is why hes hoping the
government

will

allow

foreign

direct

investment

(FDI)

in

multi-brand

retail.

Insiders say hes made several trips to Bentonville, headquarters to the American retail giant
Walmart, where hes met the top brass to discuss options. At his peak, sources say Biyani was
offered a term sheet from an undisclosed buyer that valued Big Bazaar at Rs 12,000 crore
($2,160
Image:

million).
Biyani,

Birla:

Vikas

Khot;

Ambani:

Reuters;

Jain:

Amit

Verma;

But it is unlikely his Indian competitors, Reliance or Bharti-Walmart, will pay that kind of
money to acquire the 165 hypermarkets he now has. Given market realities, it is unreasonable
to expect any Indian group to pay more than Rs 7,000 crore ($1,260 million) for these assets
argues Kampani of JM Financial. Simple back-of-the-envelope calculations indicate it is
cheaper for them to pursue organic growth. Malls have fewer takers, rents are moving south
and with downsizing across the retail business, the cost of acquiring talent is cheaper as well.
Another possibility being spoken of is that if FDI is allowed, it is entirely possible Kishore
Biyani, Sunil Mittal and Walmart will come together to form a three-way alliance. It sounds
plausible because Biyani and Mittal share a good rapport and Mittal on his part in already in a
relationship

with

Walmart.

The hitch here though is that of late, Walmart is increasingly wary of the integration
challenges that come with buying out local retailers in emerging markets. For instance, it
struggled to merge its $1 billion buyout of Trust Mart, a Taiwanese chain of super stores in
China. After investing tens of millions of dollars in renovating Trust-Marts three outlets in
Shenzhen and Guangzhou, to Walmarts disappointment, performance declined 30 percent.
Several Trust-Mart executives quit as well during the three-year merger period and Walmart
was

compelled

to

announce

temporary

suspension

of

the

merger

process.

Much the same challenges could come up with Big Bazaar. It is still to achieve cash breakeven, has many unprofitable stores, lacks standardised systems and processes to track
inventory and reduce wastage. It also places too much reliance on the entrepreneurial ability
of each store manager. And unlike Best Price Wholesale, the cash-and-carry format launched
by the Bharti-Walmart alliance, or its Easyday hypermarkets, almost every Big Bazaar store is
unique,

depending

on

size

and

location.