Walmart Stores Inc, the world’s largest supermarket, looks set to become the first foreign company to invest in multi-brand retail by buying a 49% stake in Cedar Support Service, the holding company for Bharti Retail, in September for Rs 455.8 crore.

Walmart will convert compulsory convertible debentures ( CCDs), purchased in March 2010, into 42.6 crore equity shares, according to internal documents detailing the venture’s future plans that were reviewed by ET. The due date for conversion ends in September.

The conversion will help Cedar Support Service (CSSL) infuse fresh equity in its step-down subsidiary, Bharti Retail, which has plans to nearly triple its retail stores to 638 by December 2018, from 228 now. It will roll out 104 stores by December 2013.

Bharti Retail will raise Rs 3,867 crore over six years through a mix of debt and equity to fund its expansion plans. It will raise Rs 1,085 crore as equity and Rs 2,782 crore debt, according to the documents seen by this newspaper.

“We are in complete compliance of all regulations and will continue to do so,” the Bharti Group spokesperson said.
“Walmart has invested (CCDs worth Rs 455.8 crore) in CSSL, an Indian-owned and operated firm that provides real estate advisory, facilities management, design and construction and other services crucial to our growth plans and India’s overall infrastructure development,” the Walmart India spokesperson said. “We are in compliance with India’s FDI guidelines. All procedures and processes have been followed and details filed with relevant authorities, including RBI.”

Bharti restructuring ownership in retail outlets

The government allowed foreign direct investment (FDI) in Indian multi-brand retail chains last year, but no retailer has as yet announced investment plans, partly because of the confusion over complex sourcing requirements and also because of political uncertainty as barring the ruling Congress most parties have opposed the move.

Under government guidelines, FDI in multi-brand retail needs approval from the state governments where retail chains are located. Consequently, the Bharti Group is working on restructuring the ownership in its retail outlets under Bharti Retail as some of the states in which it operates have disallowed FDI in multi-brand retail, said a person familiar with the development. Bharti Retail owns stores in 13 states.

Investments to fund losses

CSSL, which had an equity capital of Rs 443 crore, raised Rs 455.8 crore from Walmart in September 2010 as non-interest-bearing CCDs. Later, it invested almost the entire amount in Bharti Retail by way of equity and an interest-free long-term loan. As per the documents, CSSL has invested a total or cumulative amount of Rs 859 crore in Bharti Retail till now, consisting of equity amounting to Rs 533 crore and Rs 326 crore as interest-free debt.

A substantial part of Rs 3,867 crore that it plans to raise will be required to fund its operating losses of Rs 2,906 crore, apart from the capital expenditure of Rs 961 crore during the period.

Bharti Retail, which opened its first outlet in 2008, had accumulated losses of Rs 1,522 crore until December 2012. It owns 228 outlets that include 205 Easyday supermarkets and 23 Easyday Hypermarkets.

In the last fiscal ended December 2012, it had reported a net loss of Rs 538 crore on revenues of Rs 1,528 crore, compared with a loss of Rs 394 crore on a turnover of Rs 1,018 crore in 2011. In the first three months ending March 2013, the company reported a loss of Rs 127 crore on sales of Rs 419 crore.

The American retail chain owns 50.01% stake in the wholesale cash & carry joint venture Bharti Walmart Private Ltd, with Bharti Venture owning 49% in it and CSSL the remaining 0.99%.