• KCL M&A Society

Asda Acquisition by TDR Capital and the Issa Brothers

By Ashutosh Shekhar, Head of Consumer & Retail at KCL M&A Society

Deal Background

Walmart acquired Asda in 1999 for £6.7 billion ($10.8 billion) set to disrupt the UK supermarket business, using its deep pockets to shake up established players like Tesco plc and J Sainsbury plc. The acquisition though didn’t live up to the hype. The entry of Walmart in the UK supermarket triggered a price war which became more aggressive with the entry of deep discount grocers Aldi and Lidl, affecting the value-driven approach by Asda and squeezing their profits. In the past five years, Asda has seen its market share fall from 17% to 14.5% seeing the intense rivalry in the UK supermarket business, low profitability, and falling market share; Walmart began to look to offload its holdings in Asda.

The first attempt by Walmart to sell its stake in Asda was to get acquired by J Sainsbury plc for £7.3 billion ($9.4 billion). Walmart and Sainsbury announced the sale in April 2018, but the UK’s Competition and Markets Authority (CMA) raised competitive concern with the proposed Asda-Sainsbury’s merger in February 2019 before blocking the transaction two months later.

The acquisition deal of Asda by Issa brothers of EG Group and TDR Capital comes nearly a year and a half after UK regulators, citing antitrust issues, rejected an agreement by Walmart to sell Asda to rival J Sainsbury plc. The Issa brothers sealed the deal after Walmart selected their consortium as the preferred buyer, placing them ahead of a bid by US-based private equity firm Apollo. The third bid from Lone Star Funds, fronted by former Asda executive Paul Mason, was also dropped after failing to meet the price of its rivals during the later stage of the auction process.

The Deal

Acquirer: TDR Capital and Issa brothers

Target: Asda Group Limited ("Asda")

Date of Announcement: 2nd October 2020

Acquirer Advisors: Latham & Watkins

Target Advisors: Slaughter and May

On 2nd October 2020, Walmart Inc. ("Walmart"), Asda Group Limited ("Asda"), the Issa brothers, and TDR Capital announced that: the Issa brothers (founders and co-CEOs of EG Group) and TDR Capital (a leading UK-based private equity firm), have together agreed to acquire a majority stake in Asda, Walmart's wholly-owned UK business, for an enterprise value of £6.8 billion on a debt-free and cash-free (CFDF) basis. The Issa brothers and TDR Capital will acquire Asda with equal shareholding. Walmart will retain an equity investment in the business with an ongoing commercial relationship and a seat on the Board.

Asda will continue to be headquartered in Leeds, England, and led by current CEO Roger Burnley, who will serve on Asda board with representatives named by the Issa brothers, TDR Capital and Walmart. Pending regulatory approvals, the transaction is expected to close in the first half of 2021.

Target Company Details: Asda

Asda is a UK retailer founded in 1949, serving around 19 million customers a week, and currently employs more than 146,000 people across the UK. It has a multi-format, omnichannel offering, selling its products through a network of 584 grocery stores, 18 standalone petrol filling stations and 33 Asda Living stores, and also online. In addition to grocery and general merchandise, Asda also operates George, a leading UK clothing retailer with both an in-store and online offering. The company has a significant property portfolio, of which 75 percent of the square footage is freehold.

Founded: 1949

CEO: Roger Burnley

HQ: Leeds, England

Source: https://craft.co/asda

Seller Company Detail: Walmart

Walmart Inc. is an American multinational retail corporation that operates a chain of hypermarkets, discount department stores, and grocery stores, headquartered in Bentonville, Arkansas. The company was founded by Sam Walton in 1962 and incorporated on October 31, 1969. Walmart is the world's largest company by revenue with US$514.405 billion, according to the Fortune Global 500 list in 2019. It is also the largest private employer in the world with 2.2 million employees. It is a publicly-traded family-owned business, as the company is controlled by the Walton family.

Founded: October 31, 1969

CEO: Doug McMillon

HQ: Bentonville, Arkansas, U.S.A

Ticker: NYSE: WMT

Share Price at the time of writing: 145.77

Market Cap at the time of writing: 413.08B

Source: https://www.bloomberg.com/quote/WMT:US

Buyer Company Details: TDR Capital & Issa Brothers

TDR Capital

Founded: 2002

CEO: Steve Greer

HQ: London, England

TDR Capital is a leading private equity firm which invests in UK and European businesses, and partners with them to develop and grow their operations. Founded in 2002 by Manjit Dale and Stephen Robertson, the firm creates value by applying a high impact approach to investing in a focussed portfolio of companies. TDR currently manages over €8 billion of committed capital.

Issa Brothers

Mohsin and Zuber Issa, The Issa brothers, serve as co-CEOs of Blackburn-based EG Group, a convenience retailer with more than 6,000 grocery and merchandise, food service and fuel locations across North America, Europe, and Australia. The EG Group is not involved in the purchase of Asda; it is the sole operation of Issa Brothers.

Deal Motivations

Short Term

Asda has performed well in the time of coronavirus where it had a growth in sales as well as profitability caused by more spending on groceries during coronavirus restrictions; the growth is led by online sales, almost doubling during the lockdown. The rapid growth though may be poised to cool; IGD, a UK food industry training and research group, predicted in August that growth in the convenience market would moderate over the next two years, particularly given the slow recovery of city centres since the pandemic. The Issa brothers together with TDR Capital plan to invest over £1 billion in the next three years to counter slow growth projections, as well as take advantage of the rise of online grocery shopping. They plan to continue to invest in accelerating its omnichannel offering and in the resilience of its supply chain, including sourcing more food from UK farmers and maintaining its commitment to supporting domestic suppliers and small businesses.

With other UK grocers providing deep discounts to customers, Asda would continue to try to maintain its low price and value-driven position and the additional investment would help them to maintain it. To summarise in the short term, they will use the additional investment to successfully implement their existing low-price strategy while growing their customer base by expanding their online presence.

Long Term

The Issa brothers plan to expand the presence of Asda and attract more customers to drive more sales for the supermarket. They plan to expand the presence to rival that of Tesco and Sainsbury by introducing convenience store format “Asda on the Move”. There could be a nationwide rollout of Asda on the Move stores at EG-owned sites. They are also planning the introduction of branded concessions into Asda's large stores. There is already testing of a concession partnership with Greggs plc to open mini outlets in Asda shops, selling its range of sausage rolls, sandwiches, and salads. Overall, the entrepreneurial flair brought by the Issa brothers may lead to innovation that will help Asda survive in one of the most competitive markets.

Risk and Uncertainties

Although the Issa brothers have not included EG Group in the acquisition process (which already runs forecourt convenience stores for Spar and French hypermarket chain Carrefour and has partnered up with TDR Capital to set up a new entity to bid for Asda), experts have said that 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 law firm DWF. Though the deal is expected to get a green light from the CMA, there will remain uncertainty until the CMA approves the bid.

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