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Understanding Reliance Retail's share swap scheme

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Reliance Retail is India's largest retail chain and currently an indirect subsidiary of Reliance Industries, Mukesh Ambani's petro-chem going telco giant. RIL has proposed a share swap scheme for Reliance Retail's existing shareholders where they could trade in 4 shares of Reliance Retail for 1 share of Reliance Industries, valuing the Retail arm at ~2.5lk crores. In today's post we try to understand how this works, the impact it will have on both entities, and the potential rationale for the move.

Isn't Reliance Retail private?

Yes, it is. The scheme is primarily to give employees who held shares of Reliance Retail via employee stock options (equity components are often included in employee compensation to incentivize people to work harder in the best interest of the firm) to give them early liquidity and an exit. If they opt for the swap now, they will get one Reliance share for every 4 shares of Reliance Retail they owned valuing their shares at ~INR390, which they can then trade freely in the stock market. The good part of the deal is that this is an option available to the employees, meaning if they wish to retain their Reliance Retail shares, they might very well do so.

Why is RIL doing this?

One definite benefit this offers is liquidity. For someone who doesn't want to wait until the Reliance Retail listing, this could present a good opportunity to exit and deploy the funds elsewhere/spend it. According to company disclosure, there was also employee demand to provide liquidity and a potential exit. While RIL had disclosed that it plans to list its Telecom and Retail arm sometime in the next five years, the exact dates of the same remain unknown, which makes it a good option for people wanting funds immediately.

But is the price attractive?

On the face of this, it certainly does. The swap values the firm at a whopping 2.5 lakh crores, implying a nearly 2x FY19 sales multiple. It is important to note however that the firm will in all likelihood have a very attractive listing. The firm has close to 11K stores and now and has been growing exceptionally well. In Q2 this year, its revenue was more than the highest annual revenue of the next largest Indian retailer. Looking at the attractive valuations that players in the Indian retail space are getting (Dmart, Trent, et al) as investors in India and abroad scramble for the handful of well-run firms that look poised to capture a lot of India's growth upside, it certainly seems that employees who might choose to wait could be rewarded handsomely. Stock prices in the unlisted market of ~500/share also imply a 25% premium to the offered price, although that might be in part due to the illiquidity and scarcity premium in those markets.


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Disclaimer: This post is for informational purposes only. Investors should seek the advice of their independent financial advisor prior to making any investment decision based on this report or for any necessary explanation of its contents. I don't own any position in RIL on the date of writing this post.


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