British Brothers Move Closer to Completing Leveraged Asda Deal

Two British brothers are on the cusp of tying up the financing for their takeover of grocer Asda, the U.K.’s largest leveraged buyout in more than a decade.

In a deal that could shake up Britain’s highly competitive grocery market, Zuber and Mohsin Issa and TDR Capital will pay less than a billion pounds of their own money to gain control of Asda in a transaction valuing the country’s third-largest grocer at 6.8 billion pounds ($9.2 billion), according to people familiar with the matter.

“Asda is an iconic British business that we have known and loved since we were children,” the sibling entrepreneurs, who are behind the gas-station and convenience-store operator EG Group, said in a statement Wednesday. “We can invest in its future.”

The Issas and TDR struck a deal with Walmart Inc. to take control of Asda in October, with the U.S. giant keeping a stake and contributing 500 million pounds of equity. The purchasers are set to launch Britain’s largest-ever sterling corporate bond offering as part of a 3.69 billion-pound debt package to pay for the supermarket chain.

British Brothers Move Closer to Completing Leveraged Asda Deal

A spokesperson for the Issa brothers declined to comment. A TDR Capital spokesperson didn’t immediately respond to a request for comment.

Walmart first tried to sell Asda to J Sainsbury Plc in 2019, arguing that together the rivals could better withstand intensifying competition, but the deal was blocked by U.K. antitrust regulators. Asda’s stores, which focus on delivering low prices, have in recent years been badly exposed to deep-discounting rivals Aldi and Lidl.

This time, the purchase of Asda is likely to gain antitrust approval and is expected to close in the second quarter.

The Issas, who have said they can reinvigorate the business by bringing “entrepreneurial flair,” plan to invest a billion pounds in the grocer’s supply chain and online business in coming years.

Not well known outside Britain, the brothers grew up in Blackburn, an old mill town near Manchester, and started their Euro Garages business in 2001 with a single gas station. In 2016, they merged Euro Garages with TDR Capital’s European Forecourt Retail Group to create EG Group. Through a series of acquisitions funded by almost $10 billion of debt, they built an empire with more than 6,000 sites on three continents.

EG Group has grown by opening food outlets and convenience stores that sell higher-margin goods at gas stations and highway service areas in partnership with brands like Starbucks, KFC, Subway and Spar. While EG Group isn’t involved in the purchase of Asda, the Issa brothers argue they can bring the same savvy that drove growth at their forecourts business to the cutthroat world of supermarkets.

To complete the purchase, they’re selling some of Asda’s assets and piling the grocer with debt, raising concerns among some analysts over how the company will compete in a low-margin and highly competitive industry. Under Walmart, Asda was conservatively run with very low borrowings.

The debt package, detailed this week, includes 2.25 billion pounds of senior secured notes, a record for the U.K., data compiled by Bloomberg show. The offering looks likely to find favor with investors.

“It’s a great asset that the brothers are buying at a very attractive price,” said Azhar Hussain, head of global credit at Royal London Asset Management. “From a credit perspective it’s large, stable, asset rich and cash generative.”

Debenhams

The Issas also plan to sell off some of Asda’s distribution warehouses and will use the proceeds to pay down 950 million pounds in bridge financing. Asda, which employs 146,000 people and has more than 500 stores, has one of the largest supermarket freehold property portfolios.

Through this complex financing, the Issas and TDR have jointly committed equity of just 780 million pounds toward the acquisition, the people familiar said, asking not to be identified discussing financing details.

Separately, EG Group has also agreed to buy Asda’s petrol filling stations, car washes and ancillary land for about 750 million pounds.

Clive Black, an analyst at Shore Capital, said the deal will turn Asda into a riskier business, and pointed to Debenhams department store, whose recent failure can be traced back to a previous spell under private equity ownership.

“Let us hope that this is not grocery’s version of Debenhams, which was collaterally damaged by the clever financial engineering of private equity,” he said in a note. “Those engineers are smoking cigars still and the employees now looking for new jobs.”

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