Asda takeover: TDR-backed EG Group in pole position for £6.5bn deal
The billionaire owners of the British petrol forecourts operator EG Group have taken pole position in the race for control of Asda after being named the preferred bidder by the supermarket’s US owner.
Mohsin and Zuber Issa, who are working with the private equity firm TDR Capital, have pushed out a rival offer from the private equity firm Apollo Global Management with a bid that values the UK’s third largest grocery chain at £6.5bn.
The Blackburn-born brothers, who bought their first petrol station in Bury, Greater Manchester, in 2001, each own a quarter of EG Group, which is thought to be worth as much as £10bn after a series of acquisitions including forecourt groups in the US, Little Chef roadside cafes and a major Kentucky Fried Chicken franchise in the UK.
TDR owns the other half of the group, which was formed in 2016 by the merger of the Issas’ Euro Garages with TDR’s European Forecourt Retail Group and now employs 50,000 people across almost 6,000 sites in the UK, US, Europe and Australia. Sales at the group soared by two-thirds to €20bn (£18.1bn) in 2019, according to the latest accounts filed at Companies House, but the company made a pre-tax loss of £82m after servicing £8.4bn of debts.
The pair, whose parents came to the UK from Gujarat, India, in the 1960s, attended their local comprehensive school in Blackburn while their father worked in a textile factory. The brothers donate 2.5% of their wealth every year to charity and their Issa Foundation supports local hospitals and deprived schoolchildren.
Sources suggested the Issa brothers and TDR had been able to edge ahead in the deal for a majority stake in Asda, in a development first reported by Sky News, because of the potential to work together on expanding the supermarket into petrol forecourts. Speculation increased after Asda announced plans to test three convenience stores with EG Group earlier this month. Leeds-based Asda operates more than 600 stores in the UK.
The TDR-backed deal was thought likely to prove less attractive to Asda and its parent group, Walmart, as it could lead to attention from competition regulators and potentially a lengthy inquiry.
Regulators blocked Walmart’s earlier attempt to quit the UK by ruling against a proposed merger between Asda and Sainsbury’s.
While the Issa Brothers and TDR have chosen to set up a new entity to bid for Asda, experts said the structure of the bidding vehicle would not be enough to avoid a competition investigation. “Regulators look at who you are and what else you control when they’re considering mergers and acquisitions. They look behind the corporate veil in order to see what’s going on,” said Jonathan Branton, a competition lawyer at the legal firm DWF.
Apollo, which is working with the retail veteran Rob Templeman, the former boss of Debenhams, was thought to be planning a more straightforward deal based on expanding Asda’s online presence.
It is understood that Apollo has yet to be formally informed that they have not won preferred bidder status and might yet fight back with a new offer.
However, its deal may have attracted criticism over its reliance on raising debt.
A third bid, from the private equity firm Lone Star Funds, fronted by the former Asda and Somerfield executive Paul Mason, was dropped last week as it did not match the price being offered by its rivals.
Walmart restarted talks on the sale of a stake in its UK arm in July, 15 months after the collapse of the planned merger with Sainsbury’s. A deal is expected to be announced as early as this week.
Hammering out the details may take longer as bidders wrangle over potential liabilities including Asda’s pension scheme and an equal pay dispute being considered by the UK supreme court, which could cost billions of pounds in back pay.
Walmart, which bought Asda in 1999, is expected to retain a minority stake in the supermarket as part of the deal.
The group is thought to want to float Asda on the stock market but that ambition could take some time, given the volatility of markets as the coronavirus pandemic rages on. It views a private equity deal as a way to secure new investment in Asda in preparation for any initial public offering.