The buyers of Asda have announced plans to sell off its petrol forecourts and distribution centres to help fund a £6.8bn takeover.
The private equity firm TDR Capital and the billionaire Issa brothers aim to raise £950m from the sale of Asda’s distribution centres, which will then be leased back, while the group’s petrol stations will be bought by the brothers’ own EG Group for £750m.Lidl’s investment in 51 new UK shops sends it into the redRead more
Mohsin and Zuber Issa leased their first petrol station in 1999 and today have more than 6,000 across 10 countries. It is not clear whether EG will pay Asda for use of its name on the petrol forecourts.Advertisement
Financing for the Asda takeover, which is awaiting approval from the competition watchdog, will also include £3.5bn of new debt, made up of bonds and an €850m (£749m) loan. The expected proceeds from the sale of the petrol stations and distribution centres will be used to pay off two additional bridging loans being taken on to finance the takeover.
The plan will saddle Asda with debts equivalent to about four times its earnings of £1.2bn – giving it more than double the burden of its major supermarket rivals. The level of debt is likely to raise concerns, particularly as the Issa brothers’ EG Group has funded its rapid expansion by loans. Last year’s accounts showed a debt pile of about £7bn.
Clive Black, a retail analyst at the city broker Shore Capital, said: “The risk profile of Asda has undoubtedly gone up.” He said the need to service additional debt and pay rents on the distribution centres alongside the sale of petrol forecourts, which are beneficial to cashflow, would all place extra pressure on Asda’s finances.
“They have bought Asda when supermarkets have got elevated sales and brighter general prospects as working from home and online groceries are probably here to stay. There is lots of money around and it is very cheap for risk-taking entrepreneurs and private equity but only time will tell whether they will look back and think that was a good thing to do.”
TDR and the Issas are putting up £780m of cash, while Walmart, the current owner of Asda, will contribute £500m of equity to retain a minority stake in its UK arm.
The potential new owners have also committed to invest £1bn in the company, although it is understood this will be funded from Asda’s resources and will not be new cash. The supermarket’s chief executive, Roger Burnley, will continue to run the chain after the acquisition.
Mohsin and Zuber Issa said they were putting in place a “robust capital structure” to support their growth strategy for the company and were “confident that external investors will share our belief in Asda’s strong fundamentals and exciting future prospects”.Advertisement
Sale and leaseback deals have proved problematic for retailers as they can tie them to long rental agreements that can prove onerous if stores need to be updated or exited.
The Issas said: “Asda is an iconic British business that we have known and loved since we were children. We are proud to bring its ownership back to the UK and delighted that, with the support of TDR Capital and Walmart, we can invest in its future.
“Local control means that strategic decisions will be more closely aligned with colleagues, customers and communities. We are putting in place a robust capital structure … and we are confident that external investors will share our belief in Asda’s strong fundamentals and exciting future prospects.”
The Competition and Markets Authority (CMA) is considering whether the acquisition will lead to a “substantial lessening of competition” in the UK. The CMA must make a decision by 18 February on whether the deal should be subject to a more in-depth inquiry.
Last year the CMA blocked an audacious attempt to merge Asda with its larger rival Sainsbury’s, which would have created a new market leader.