Asda Group, owned by the Issa brothers and TDR Capital, have announced they will acquire EG Group for £2.3 billion. EG Group are owned by, the Issa brothers and TDR Capital… what is going on here?
Mohsin and Zuber Issa are best known for founding the petrol forecourt empire EG Group. Starting with a single garage in 2001 Blackburn, England, the EG Group has expanded dramatically over the last two decades, now spanning 6,112 locations (5,829 fuel stations and 783 standalone food/grocery locations), across the UK and Ireland, Europe, Australia and the U.S.
The Issa brothers caused quite the stir in 2020 when they acquired Asda supermarket group from Walmart for £6.8 billion, in one of the biggest leveraged buyouts since the financial crash (the Issa brothers and TDR Capital reportedly put up £780 million, raising the rest of the purchase price using debt). They now want to expand Asda, taking it to the number 2 spot among the Big Four British supermarkets (Tesco, Sainsburys, and Morrisons being the other three).
EG Group is a highly leveraged business, indeed it credits its rapid growth to taking on huge sums of debt used to acquire hundreds of new locations at a time. This has left it with colossal debts of over £7.6 billion. Taking on a lot of debt is not necessarily a bad thing, so long as it can be paid back, and this is exactly the challenge faced by the EG Group. A large portion of its debt will reach maturity over the next several years. If EG Group cannot pay off the debts, it faces insolvency.
EG Group has a need for money to pay its debts, Asda has a need for more stores, the acquisition seems like a marriage made in heaven.
What's to gain?
The most obvious one is – of course – preventing the EG Group from financial collapse. The £2.3 billion will be used to repay a portion of the £7.6+ billion debts. This will not completely pay off EG Group's creditors, however it will ease just over a couple billion pounds' worth of the pressure. How the funds will be divvied up among creditors we can only speculate, however in all probability the most urgent and/or the most expensive (the debt carrying the highest interest) will be paid off first. Wherever the funds go, it will give EG Group some breathing room on the remaining £5.3 billion or so.
This is not the only goal though. Asda is currently the 3rd biggest supermarket in the UK with 14.1% market share, behind Tesco (dominating with 26.9% of the market) and Sainsburys (2nd place, 14.6% of the market) and followed by Morrisons (4th place, 9.1% of the market). The Issa brothers and Asda want Asda to take on the number 2 spot. They hope to achieve this with the acquisition of the EG Group in two ways:
First, a dramatic expansion of their petrol forecourt operations. Currently, Asda operates 320 petrol stations across the UK and EG Group operates 388. Following the acquisition Asda will more than double its number of petrol forecourts.
Asda 'On the Move' convenience stores. Asda has already partnered with EG Group, since October 2020, to open a number of convenience store outlets at EG Group sites across the UK. Convenience stores were an area in which Tesco and Sainsburys (with Tesco Locals, Metros and Sainsbury's Locals) had significant presence, but Asda had not ventured into. This is something Asda and the Issa brothers aim to remedy, expanding Asda's coverage and increasing customers. If EG Group is rolled into Asda, there will be a further 696 foodservice outlets into which Asda could expand its convenience store operations.
If the Issa brothers and Asda can pull it off, they can simultaneously pull EG Group out of trouble and rocket themselves to the number two spot of supermarkets in the UK.
What's to lose?
The EG Group will still have around £5.3 billion of debt, that is a rather large sum. An injection of cash will stave off creditors in the short to medium term, but it will not solve the underlying issue. EG Group would not have needed such an injection if it was already making sufficient profits to pay off its debts. In 2022 its finance costs (which include debt interest) vastly exceeded its profits. While an injection of cash will help them in the short term, it remains to be seen whether they can pay off future debts as they fall due. If they cannot, Asda and its owners will have to find the cash elsewhere.
– Consumers and supermarkets alike have not had the best few years. This has caused a shift in consumer preference, with each of the Big4 supermarkets losing a portion of their market share to discounters Aldi and Lidl. This includes Asda, despite the fact – historically – Asda has posited itself as the budget friendly supermarket. The changes may be small – by some estimates only between 0.2-0.7%, but with the total market value of UK grocery retail in the region of approximately £211.9 billion, those are losses of between £42-148 million of the market. The point is, getting some more stores might push Asda to the number 2 spot, however that's not going to last for long if Asda loses tens of millions of pounds revenue owing to consumers switching to budget alternatives. That's before factoring in the impact of recent higher costs of gas, electricity and produce caused by wider economic conditions. Not to mention Asda's own debts, which it also needs to repay.
Other Stakeholders –
This is all a bit of a gamble. If it does not succeed, the EG Group will have debts to repay, as will its' parent company Asda, as will Asda's owners the Issa brothers and TDR Capital. It's hard to imagine a giant like Asda disappearing from the UK high street, but if plans do not succeed we could see closure of stores, redundancies, and greater inconvenience on the consumer. It's a gamble that could have a detrimental impact on not just Asda's shareholders but consumers at large.