Asda owners use proceeds from an earlier deal to fund EG’s takeover

Asda owners use the proceeds from an asset sale to fund the supermarket’s contribution to the takeover of EG Group. Another business they own. This is the latest example of their financial engineering, which has allowed them limit their cash expenditure on the business.

Asda has announced a £2.3bn deal earlier this week to purchase the UK and Irish operations for petrol station business EG Group. The two companies are owned jointly by British businessmen Mohsin Issa, Zuber Issa, and TDR Capital.

The deal for the takeover of 350 petrol stations and over 1,000 food outlets – EG owns some outlets such as Starbucks and KFC, and operates others like Leon – will be financed largely through debt and sales of property. The Issa Brothers and TDR have also announced that they will contribute “£450mn additional equity” to the transaction.

Those familiar with the discussion say that the company confirmed later to lenders that the equity represented the proceeds from an earlier real estate deal. Mohsin ISSA told reporters in a phone call last week that equity was “sort-of” still present today.

TDR and Issa Brothers funded £950mn from their £6.8bn purchase of Asda by 2021, through the sale and leaseback its warehouse network. US investor Blackstone purchased the property portfolio at £1.7bn. This created a windfall of £450mn for the owners. EG Group declined comment. Asda stated that the EG deal is about “driving revenue, creating value for customers, and building a stronger business”.

Asda will have an attractive capital structure and a clear strategy for growing ebitda. These factors, combined with a strong cash-generation capability, will allow Asda over time to reduce its debt.

The Issa brothers, TDR and the TDR contribution of £200mn  in April was just new cash to the Asda purchase in 2021.

Lord Stuart Rose who chairs both companies said that Asda’s main goal was to become a “UK Retail Champion” and denied suggestions the deal was driven by financial engineering.

The bonds of both EG and Asda rose when the terms were revealed on Tuesday, as many investors expected the supermarket to issue more debt to fund the transaction.

The £450mn represents a new cash injection for Asda bondholders because the warehouse assets were outside the group they financed.

Asda also received a loan of £770mn from the credit arm at US private equity firm Apollo to finance this deal.

Apollo received the debt discounted to its face value at a discount of over 11 percent per annum at current interest rates.

According to sources familiar with the matter, the US investor had already been a lender for both Asda as well as EG Group. This means that it will be able to benefit from the repayments of EG’s debt.

Amarveer Singh is a senior credit analyst at CreditSights. He said this week in a report: “The new equity was a shock and serves as an encouraging signal to investors. The fairly long maturity of the term loan (understandably costly) provides refinancing breathing space for existing bonds that mature in 2026 or 2027.”