In today’s Finshots, we explain why minority shareholders are unhappy with Reliance Retail.

The Story

When a company wants to reward its employees, sometimes, it gives them shares. It tries to make them feel like they’re part owners in the company too. If it’s a publicly listed company, the employees can sell the shares quite easily and make some money. But if it’s a private company, it could be a tad bit more complicated. Most of the time, it’s just paper wealth. And employees need one of 3 things to happen if they were to make actual money out of it.

  1. The company has to feel generous and buy back the shares at a higher price.
  2. The company goes for an IPO and the employees can sell the shares in the open market. Or...
  3. The employees send out feelers in the underground market to try and find buyers who’ll take the shares off of their hands at a hefty premium.

And it’s this third bit that employees at Reliance Retail Ltd resorted to. Over the years, some employees got their hands on the company’s shares and offloaded them in unofficial markets exchanging them for cash.

This meant that some lucky folks who weren’t employees (or unlucky…but we’ll get to that) snagged these coveted shares. And we say coveted for a simple reason. In 2019, people were willing to buy the shares at ₹500 a pop in the unofficial market. At a mind-boggling P/E multiple of 200. Basically, for every rupee of profit that the company made per share, investors were willing to pay ₹200 to get their hands on it. For context, one of Reliance Retail’s more popular peers, D-Mart, which was listed on the stock exchanges was trading at a P/E of 93 times back then. The love for Reliance Retail soared even more in the past few years — just last week, investors were willing to shell out ₹3,000 rupees a share.

That’s a whopping 500% return in just 4 years. And the market for Reliance Retail shares was reaching dizzying heights.

Now this was all thanks to some explosive growth. As per a recent report by Alliance Bernstein, Reliance Retail’s revenues have hit $32 billion. This is 2.5 times the size of the next 3 retail giants combined. Its market share jumped from 1.2% in FY18 to 3% in FY23 — of the overall retail pie that includes organised and unorganised retail. And the company had been spreading its tentacles everywhere these past few years. By buying Netmeds in the pharmacy space, acquiring Urban Ladder for furniture and Clovia for lingerie, investing in Dunzo for hyperlocal commerce, reviving Campa Cola, and bringing international brands such as Pret A Manger to India. And that’s just a tiny sampler. The list goes on.

Oh, and to add fuel to the fire, there were whispers about an impending IPO for Reliance Retail too. Everyone wanted a piece of the stock before it popped during a public listing.

But on Friday, these investors had the shock of their life.

What happened, you ask?

Well, Reliance made a big announcement. It said that it wants 100% ownership of its shares. And it wants retail investors, who own just 0.09% of the shares, out of the picture now. Reliance will buy them out.

On the face of it, it’s a good thing, no? It’s the exit #1 option we spoke about at the start. So investors should’ve been happy.

But here’s the thing. Reliance is willing to pay only ₹1,362 per share!

Wait…that means all those investors who were lapping up shares at ₹2,000 and ₹3,000 are facing huge losses. They’re calling Reliance all sorts of ugly names. They feel that they’ve been cheated by the family of the richest Indian. That they should get the share price they deserve.

But here’s the thing. Maybe all this name calling is pretty pointless. Maybe these investors are to blame here. And maybe they should’ve been paying a little more attention to what was happening instead of rushing to buy the ‘next hot thing’.

You see, firstly, if they’d dug through some research reports, they would’ve seen most brokerages say something along the lines of “We believe Reliance Retail contributes 30–40% to Reliance Industries’ share value.” They meant that if Reliance Industries’ shares were trading at ₹2,500, around ₹750-₹1000 of it was thanks to the money that the retail unit was spinning.

So investors running around the private markets should’ve kind of used that price as the anchor before jumping into decisions.

Secondly, sure you could argue that there were only a limited number of shares available. There was a scarcity. And that would’ve created a premium. That’s fair. But maybe they should’ve paid a bit more attention to what happened in 2020.

See, back then, the Reliance expansion spree had just begun. And it wanted to raise a few thousand crores to fulfil its retail ambitions. So it got investment firms like Silver Lake, Abu Dhabi Investment Authority, and General Atlantic on board.

You’d imagine that investors would’ve gotten excited right? Big names were at the table. And everyone would’ve thought that an IPO would be imminent.

But here’s the thing. Reliance didn’t actually raise money through Reliance Retail. In fact, it had set up a whole new entity called Reliance Retail Ventures Ltd in the middle. This RRVL would be the holding company for all of Reliance’s retail plans. It would have subsidiary companies like Reliance Retail and a few others under its umbrella. And it was RRVL that sold a 10% stake to raise money.

At the end of the day, the final structure looked something like this: Reliance Industries owned Reliance Retail Ventures Ltd which also had some big investment firms as its shareholder. And this entity in turn owned Reliance Retail.

So with RRVL in the mix, the equation had changed drastically. As the folks at investment firm Capitalmind pointed out quite presciently back then:

“… all value unlocking is happening at the parent level, i.e., in Reliance Retail Ventures. So, it will become much more difficult for these shareholders [Reliance Retail] to find a buyer for these shares. Even in the future if RIL [Reliance Industries Ltd] plans to list its retail unit, it will be Reliance Retail Ventures which will get listed.”

And if you put these together, you’d have to agree that Reliance hasn’t fleeced its shareholders. The writing was on the wall.

In fact, even today, Reliance doesn’t seem to be acting stingy. You see, it got a couple of big names — EY and BDO — to conduct a valuation of the company. And these folks actually said one share of Reliance Retail is worth around ₹850-₹900. So Reliance is willing to pay a 50% premium to buy back the shares. It doesn’t seem like it’s out to cheat anyone. And it’s really not Reliance’s fault that prices in the private market went out of whack.

But investors are annoyed. Because they’re driven by emotions.

So, the question is — do the investors have any recourse at all?

Well, some folks are pointing to what happened in 2019. Back then Reliance had said that it would do a share swap. Give 1 share of Reliance Industries for every 4 shares of the unlisted Reliance Retail. But investors pushed back. They said that the valuation was too low. And the plan failed because investors pushed back.

So yeah, maybe something similar could happen again.

Or maybe the National Company Law Tribunal (NCLT) will ask Reliance to reconsider the valuation. With the tiny fraction of shareholders making a lot of noise, maybe it’ll come to the rescue? We don’t know.

But all we can say for now is that Reliance doesn’t seem to be doing much wrong in terms of how it’s going about this. And maybe investors should have been a little bit more cautious? What do you think?

Until then…

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