Reliance Retail buyback ignites IPO prospects as PE investors make big bucks in 3 years

In the second half of 2020, RIL sold about 10% stake in Reliance Retail Ventures Ltd to a bunch of private equity firms such as Silver Lake Partners, KKR, GIC, TPG Global and General Atlantic, besides sovereign wealth funds like Mubadala, ADIA, and PIF, for about $6 billion.

This investment valued the retail arm then at about $50-55 billion, and thanks to the expansion and growth of this business, the valuation has doubled in less than 3 years of the investment made by the above-mentioned institutions.

Global investment bank JPMorgan Chase sees Reliance Retail’s enterprise value at $112 billion, while UBS has valued it at $110 billion and Bernstein at $111 billion.

At more than $100 billion valuation, Reliance Retail is bigger than FMCG giants like Hindustan Unilever and ITC.

Interestingly, retail is now the largest part of RIL’s SOTP (sum-of-the-parts) valuation and the one segment where investors see a much better operating environment over the coming years.

With three years nearing an end, private equity investors will look for an exit option to lock in the profits reaped in the tenure of their investment.So, one could probably see the share buyback in Reliance Retail as a stepping stone in the way of an initial public offering of the retail major.

Reliance Retail is 99% owned by Reliance Retail Ventures (RRVL), and RIL owns 85% of RRVL.

Such an announcement by RIL comes just a month before the company’s annual general meeting with stakeholders. Historically, RIL has made key announcements on value-unlocking catalysts and future growth plans in the AGM, and therefore, investors keenly look forward to it.

The past two AGMs left investors in dismay as there were no big bang announcements by RIL.

But the announcement of share buyback in Reliance Retail and demerger of Jio Financial Services has ignited hopes of some goodies this time around among investors.

Concerns Recede?
While the retail business of RIL has been expanding through diversification and has clocked consistent earnings growth, investors remain unsure of the endgame for Reliance Retail, given no major disclosures in the recent past.

Reliance Retail has aggressively added floor space in the last 2 years, with a sharp increase in overall store count, warehousing space addition, acquisitions of multiple brands across categories and entry into newer categories and formats.

However, the same is not yet reflected in the earnings, and therefore, there are investor questions on what is the way forward for this business, said JPMorgan.

JPMorgan expects disclosures around the retail business to improve over the coming quarters as RIL eventually moves to list Reliance Retail.

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