The petrol station billionaires buying Asda are planning to sell the supermarket’s garages to their own EG Group, arrange a sale and lease back of its warehouses and raise £3.5bn in debt to fund the transaction.
The details of the highly leveraged financing package behind one of Britain’s biggest private deals were published on Wednesday by the supermarket’s new owners, brothers Mohsin and Zuber Issa and the private equity firm TDR Capital.
The deal, announced in October, values Asda, the UK’s third-largest supermarket, at £6.8bn. Its current owner Walmart retains a minority stake.
Asda has said it will sell €840m of debt, which is expected to attract a junk credit rating of BB, to fund the deal, plus a further £2.75bn of bonds.
The debt-fuelled financing is a big change from Asda’s previously conservative approach. Its last set of accounts, for the year to December 2019, showed no external debt and almost £3.5bn of freehold property assets.
Further funding could come from expensive debt-like financing that the Issa brothers and TDR Capital raised in November. The two brothers and TDR raised hundreds of millions of pounds of “preference shares” — considered halfway between debt and equity — in an offshore holding company that owns EG Group.
“Asda is an iconic British business that we have known and loved since we were children,” the Issa brothers said in a statement. “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 Asda deal is the UK’s biggest leveraged buyout in more than a decade.
Roger Burnley, Asda’s chief executive since 2018, said the group would “work closely with the new owners on how these Asda [petrol stations] would operate as part of the EG Group under the Asda brand and ensure they continue to be a price leader in the fuel sector”.
The Issas and TDR also plan to sell and lease back “certain distribution assets”. Asda operates 39 distribution facilities in the UK, including 21 food depots.
The market for such assets is at present very strong, partly because of demand from ecommerce. Sports Direct, Very Group, Next and B&M have all sold and leased back distribution centres over the past 18 months.
Asda’s board will initially have six members. Four of them — the brothers and TDR representatives Gary Lindsay and Manjit Dale — are also on the EG board. Chris Nicholas, the chief financial officer of Walmart’s international division, and Asda’s Mr Burnley will also be on the board. Independent directors will be added “in due course”, the brothers and TDR said in the statement.
The lack of independent directors on EG Group’s board was a key concern for Deloitte, which resigned as EG auditor soon after the Asda deal was announced citing governance concerns.
EG has since appointed Stuart Rose as non-executive chair and John Carey, a former BP executive, as an independent non-executive director.
The £750m enterprise value of Asda’s forecourts business of more than 300 petrol stations was more than 11 times its earnings before interest, tax, depreciation and amortisation, the statement said. The petrol stations will keep their Asda branding.
The deal is still subject to approval from the Competition and Markets Authority but is expected to be completed this month.
This article has been modified since publication to clarify that Chris Nicholas is CFO of Walmart International, not Walmart Inc