Following Asda’s acquisition of EG Group’s UK and Ireland businesses, the grocer has been keen to stress this will be a win for consumers.
On paper, Asda’s acquisition of EG Group’s UK and Ireland operations will create a powerhouse with combined annual revenues in excess of £30bn, serving more than 21 million customers a week through 600 supermarkets, 700 forecourts and 100 convenience stores.
But the deal has drawn its fair share of detractors, with some arguing it’s a clever way for the owners to shift debt from EG Group in the face of ballooning interest rates.
Shopworker union GMB has also been critical, saying the owners are trying to force Asda workers to take pay cuts as part of “private equity slash-and-burn tactics” to pave the way for the acquisition.
So what does this acquisition mean operationally and who stands to gain the most?
On the road
At the heart of the merger lies the owners’ desire to rapidly expand Asda’s convenience store estate on existing EG Group petrol stations.
Asda will buy 350 of EG Group’s UK and Ireland petrol stations and more than 1,000 food-to-go locations. Combined with Asda’s existing c-store network, and the 119 sites it acquired from the Co-op in October 2022, this will expand its convenience estate to 700-odd locations.
According to Asda and EG Group co-owner Mohsin Issa: “We know that convenience is the fastest growing in terms of the grocery market, therefore the opportunity for us to find something of significant scale that’s the best in class, very well invested and has a proven track record, gives us significant confidence around the viability and sustainability of this business going forward.”
No.2 for the money
In doing this, and integrating EG-owned food service businesses like Leon into the grocer’s portfolio, Mohsin says Asda would have the firepower to overtake Sainsbury’s as the second biggest supermarket by market share in the UK.
“The acquisition will help us with our plan to restore Asda to the number two position in the UK grocery market,” he said. “We will pretty much be on a par with them [Sainsbury’s] after the acquisition, with a huge runway to enhance.
“When we convert EG assets into Asda branded we see a significant uptick in sales, and that’s where we see a lot of the opportunities”.
Asda Chairman Lord Stuart Rose added that the owners were “ambitious for the business, to grow the business and to be as big as we can be”.
IGD global insight leader Bryan Roberts believes that while the move may “sharpen Asda’s ranging and pricing and add the EG Group locations”, he’s less sure that Sainsbury’s will be immediately concerned by the proposed acquisition.
Instead, he believes the acquisition could open the door for Asda’s Express and On the Move convenience fascias to be rolled out across EG Group’s European, American and Australian forecourt estates in future.
According to Roberts: “They may look at replacing current retail partners in those markets with Asda’s c-store fascia as a banner overseas. That would give them a very different business proposition to any of their UK competitors, certainly in the medium to longer term.”
Home sweet home
Upon completion of the deal, Asda is set to invest £150m over the next three years into “fully integrating the two businesses”.
EG Group is currently based in offices in the Issa brothers’ hometown of Blackburn, while the grocer continues to operate out of Asda House in Leeds.
Mohsin Issa hasn’t ruled out merging the two businesses in the future, nor would he ultimately commit to any merger being based in Yorkshire.
He says: “We know we’ve got some skillsets in Blackburn today. We’ve got some skillsets in Leeds. Obviously, the home is Leeds for Asda, and we’ll continue to sort of look at that and see where it works and if it works, we will maintain that policy. As of today, we’ve no plans to axe Blackburn either.”
While the business wouldn’t commit to where its future home location would be, it did say the acquisition would be a net creator of jobs.
At least one new job created will be that of a group chief executive, with Mohsin having effectively run the Asda business since former chief executive Roger Burnley stepped down in August 2021.
Price point
Both Rose and Mohsin Issa stress that the move will be beneficial to consumers when it comes to price.
On fuel, they argue that Asda remains the lowest in terms of fuel price of the big four supermarkets and the acquisition would allow more motorists access to these prices across the UK.
On food, £100m of synergies between the two businesses have been identified, while Mohsin says the acquisition would give customers “a wider reach in terms of the value food proposition”.
“The DNA of this business is about value, and we’re not here to rip the heart out of the DNA. We’re here to enhance it and by acquiring this business today we will enhance our value credentials.”
When pushed whether adding further debt would lead to higher prices, Rose says: “It will not lead to higher prices as a result of this, that’s rubbish.”
However, one ex-senior level Asda executive voiced concerns that the £100m synergies “won’t trickle down to consumers, it’ll trickle down to pay for the extra debt they’re heaping on the business”.
Room for leverage
As part of the transaction, Asda takes on an extra £770m of loan debt and will be looking to sell and lease back around £1.1bn in store freeholds.
However, the business insists that as it was adding EG Group’s UK and Ireland freehold estate, with a value of £1.2bn, the move would “have no impact” on the grocer’s £9.65bn freehold value.
When asked if the move represented a piece of “financial engineering” on the part of the Issa brothers and TDR Capital to shift debt from its EG business, Rose is relatively unapologetic.
“The primary driver of this deal was to create a business, a different business, a multichannel champion and scaling-up opportunities,” he says. “If as a consequence of that you also get the opportunity to deleverage on the other side, what’s wrong with that?”
The owners can now avoid paying back the roughly £7bn debt bill due in 2025.
Shore Capital analyst Clive Black says that while the acquisition allows the brothers to avoid that cliff edge, it casts doubts over whether they want to stay with Asda long term.
“What this means for the wider EG venture remains to be seen,” he adds. “Do TDR Europe and the Issa brothers’ ultimately want out”?
Whatever the Issa brothers and TDR’s ambitions for a sale in the long term, for now the merger expands Asda’s convenience business while avoiding a huge debt bill. Lenders and stakeholders alike will be overjoyed by this, but whether consumers enjoy a boost remains to be seen.
No comments yet