The chair of Asda has rejected suggestions that a £2.3bn deal to buy parts of sister business EG Group was driven by financial engineering, promising that the combination of the supermarket chain and petrol station group will create a new “retail champion” in the UK.
The acquisition comes as rising interest rates have hit indebted EG Group, which like Asda is jointly owned by the billionaire Issa brothers and private equity firm TDR Capital. As part of a deal announced on Tuesday for EG’s UK and Irish operations, Asda will take control of 350 petrol stations and more than 1,000 food-to-go locations.
The proceeds from the sale will be used to repay some of EG’s $9bn of debt as the bulk of the petrol station group’s borrowings come due in 2025.
To fund the deal, Britain’s third-largest supermarket group is borrowing £770mn from buyout group Apollo, raising £1.1bn of property-related transactions, mainly through the sale and leaseback of some of its stores, while Mohsin and Zuber Issa and TDR are providing about £450mn of additional equity.
With annual revenues of about £30bn and 170,000 employees, the combined group will span 600 supermarkets, 700 petrol forecourts and 100 convenience stores. The transaction is expected to help Asda expand its share of the competitive convenience sector as it seeks to overtake J Sainsbury to become the UK’s second-largest supermarket chain.
Lord Stuart Rose, who chairs both Asda and EG, said that the transaction was primarily meant to turn Asda into “a new retail champion in the UK”. When asked whether it was a case of using financial engineering to buttress EG’s finances, he said: “The primary driver of this deal was creating a business, which is a different business, a multichannel champion . . . now, if as a consequence of that you’ve also got the opportunity of deleveraging on the other side, what’s wrong with that?”
The purchase of Asda in 2020 by the Issa brothers and TDR was the UK’s biggest leveraged buyout in more than a decade, capping a period of rapid, debt-fuelled expansion. The Financial Times revealed last month that the Issa brothers and TDR contributed just £200mn towards the deal that valued Asda at £6.8bn.
Rose added: “We have thought very carefully since the acquisition [of Asda] about what we want to do with this business, and I don’t want to diss its previous owners, but it was a bit sleepy, it lost its direction. Under the leadership of Mohsin [Issa], we’ve shown that we want to be a force that can start growing. You can’t do that if you stand still.”
Combining Asda with the UK and Irish operations of EG Group is expected to cut the latter’s net leverage to under five times, having stood at almost six last September.
The supermarket chain said the deal would strengthen Asda’s balance sheet, adding about £195mn of earnings after rent, and about £100mn of synergies over the next three years. Asda’s leverage of approximately 4.3 times, excluding operating leases, will remain the same after the transaction, it said.
According to people familiar with the matter, Asda’s six-year loan from Apollo carries an annual interest burden of 6.75 percentage points over a floating-rate benchmark, which equates to a total cost of more than 11 per cent at prevailing interest rates. The US private equity group is expected to sell on a portion of the debt to a few other investors.
Tristram Leach, Apollo’s co-head of European Credit, said: “Asda is a great British business with huge heritage. We’re pleased to support this acquisition as a lender, bringing certainty and scale to the financing.”
The deal will lead to more Asda Express shops being rolled out across the EG estate. Since the acquisition of Asda, a total of 166 EG sites have already been converted to Asda On the Move formats, which stock Asda own-label products.
Nadine Houghton of the GMB union, which represents workers at Asda, said the merger required “proper scrutiny” from the competition watchdog. “We are concerned rising interest rates will leave the debt of the UK’s third-largest retailer unsustainable,” she added.
The transaction is not expected to qualify for merger review by the Competition and Markets Authority, according to people familiar with the process, after it previously approved the Issas’ deal to buy the UK grocer in a £6.8bn deal. The CMA declined to comment.
