Private equity: how to buy a £6.8bn company for £200mn

One scoop to start: Teck Resources believes it is close to winning the backing of its largest shareholder for its plan to separate its metals and coal businesses, as the Canadian miner battles a $23bn hostile takeover bid from Glencore, its chief executive Jonathan Price told the FT.

In today’s newsletter:

• The brothers behind a mega-leveraged buyout

• Apollo sees the potential in THG

• A corporate energy battle in Rome

‘The Equity Contribution’

When the UK supermarket group Asda issued bonds to fund its £6.8bn buyout by private equity firm TDR Capital and brothers Mohsin and Zuber Issa two years ago, its prospectus had a section headed “The Equity Contribution”.

Under that heading, it said there would be £780mn of “funds raised by the shareholders”. That’s already a very small equity cheque for a leveraged buyout of that size, which was made possible by a series of asset sales and debt deals.

What the prospectus didn’t mention — and what DD’s Kaye Wiggins and Rob Smith have revealed — was that £580mn of that sum came from a related party loan.

That means TDR and the Issas were able to stump up just £100mn each to take control of a company valued at £6.8bn. Yes, you read that right: just £200mn between them.

Here’s how it worked. The £580mn loan was made by Optima Bidco, the Jersey parent company of EG Group, the highly leveraged petrol stations company that the brothers and TDR also own. This diagram explains how the companies are connected.

Optima sold preference shares to raise the money to make that loan. It now has more than £1.7bn in total outstanding preference shares — and they are becoming more costly. Their coupon is set to rise to 10 per cent this year and 12 per cent next year.

Even before that rise, Optima has already borrowed from EG Group to pay the holders of the preference shares. The petrol stations business lent its parent company $112mn in 2021.

EG didn’t say how much interest it was charging, only that it was “comparable with commercial rates of interest”. (Which is similar to what people close to the company have said about the interest it’s now charging Mohsin and Zuber on the previously interest-free loans they took from EG to buy themselves two private jets, as the FT revealed last year.)

Now, EG Group is racing to cut its debts ahead of a big 2025 refinancing deadline. Its core earnings fell 15 per cent in the last three months of 2022 and it said in March that it was committed to “significant deleveraging” and was looking for ways to “put in place a sustainable capital structure”.

That’s the context you need to understand when you hear talk of Asda buying EG Group’s UK business.

Shuffling the companies within the TDR-Issa empire — or, selling part of the business to themselves — would pile more debts on to Asda while helping EG Group to deleverage.

As one person close to the owners put it: their empire is “heavily leveraged on [the EG Group] side and modestly on the [Asda] side”, so the deal would mean “rebalancing and deleveraging”.

As things get tough, it’s worth remembering that TDR and the Issas have done very well out of their partnership so far.

A TDR presentation to potential investors last year said one of its funds, which originally invested €234mn in EG Group, received a €1.2bn windfall on that deal. The brothers have shared a similar amount, two people with knowledge of the matter said.

What does Apollo see in THG?

Matthew Moulding hasn’t been a fan of the London stock market since he took his ecommerce business THG public in 2020.

The purveyor of lipstick, vitamins and protein powder opened in trading to great fanfare at a valuation of about £5.4bn. Today it trades closer to £1.2bn.

That heavy sell-off has attracted interest from investors who see an undervalued asset, the latest being private equity firm Apollo, which has submitted a takeover bid for the company formerly known as The Hut Group.

Moulding, a prolific social media user, said this month that he “wouldn’t recommend” listing on the London Stock Exchange. It’s still unclear, however, whether Apollo will face a smooth path to take his business private.

THG didn’t disclose what Apollo was willing to pay for the business but the company last year rejected a bid from investors Belerion Capital and King Street Capital Management that valued THG at about £2bn.

Moulding has said he would give up his “golden share” in the business to allay concerns about corporate governance, but has yet to do so. This gives the entrepreneur, who still owns about 25 per cent of the company, the power to veto any takeover deals.

Apollo would be paying up even after former investor SoftBank sold off its position in THG, crystallising a £450mn loss for the Japanese technology investment group.

So what’s in it for the private equity firm? It could be enticed by the same thesis as activist investors such as Kelso, which have argued that THG’s nutrition business could be a particularly valuable asset. Sparta Capital, founded in 2021 by Elliott Management’s Franck Tuil, also has a stake in THG.

The discount between THG’s share price and the sum of its parts is only growing, Lex notes.

The activist hedge fund taking on Rome

Pressure is mounting on Zach Mecelis, the head of hedge fund Covalis Capital, to withdraw an alternative slate of board candidates for Italian utility Enel.

That’s largely because minority shareholders never fight the Italian government over its picks over who runs state-controlled companies, and Rome owns a 23 per cent stake in the highly indebted energy group.

Last week the government announced it was planning to replace the current management. Flavio Cattaneo, a seasoned executive at publicly-controlled Italian companies, was named chief executive, and Paolo Scaroni, the current chair of football club AC Milan and former boss of Italy’s other state-controlled oil group Eni, was selected as chair.

Neither was a preferred pick of prime minister Giorgia Meloni.

Cattaneo was deputy prime minister Matteo Salvini’s candidate, and Scaroni is a longtime ally of former prime minister Silvio Berlusconi. Both politicians are perceived as being too close to Russia’s Vladimir Putin by international investors.

Enel shares were down 4 per cent following the news and analysts said uncertainty over strategy was to blame.

The appointment process, which takes place every three years, is designed to allow political parties to exercise their clout within coalitions and over the companies by placing affiliates in top jobs. Shareholder votes are usually a rubber stamp of those selections.

Lithuania-born Mecelis, who has held a small Enel stake through his Mayfair hedge fund since 2004, decided he was going to “speak up for those who can’t”.

People close to the process told the FT’s Silvia Sciorilli Borrelli that several potential candidates withdrew their acceptance after being pressured by Italian officials. In frantic calls at the weekend, those same officials also tried to convince Mecelis it was best to stick to the usual process. He insisted he had “no other choice”.

“It’s a question of governance and transparency,” he said the night before publishing an alternative list of candidates to compete against Rome’s at the upcoming annual general meeting on May 10. Three minority board seats are up for grabs.

Job moves 

• EY has told US staff it will cut 3,000 jobs, mainly in its consulting unit.

• Exor, the holding company controlled by Italy’s billionaire Agnelli family, has selected former Harvard Business School dean Nitin Nohria as chair, succeeding World Bank-bound former Mastercard chief Ajay Banga.

• Goldman Sachs alum Scott Silverglate has joined Evercore as a senior managing director after a brief stint at SVB Securities.

• Andrew Golden will step down as president of the Princeton University Investment Company in June after almost three decades running the near-$20bn endowment.

• Lazard has hired FTI Consulting’s Sanjeev Khemlani and Houlihan Lokey’s Reid Snellenbarger as co-heads of its restructuring and capital solutions group.

• JPMorgan Chase has hired Deutsche Bank’s Khaled Fathallah as head of metals and mining for Europe, the Middle East and Africa.

Smart reads

First Republic’s mortgage machine The US bank peddled generous loans to wealthy investors. But the strategy would eventually fuel its undoing, Bloomberg reports.

Hungry for payouts A Forbes investigation reveals how Subway’s late founders pocketed billions from the sandwich empire, leaving franchisees with the crumbs.

Britain’s ‘big bang’ goes bust The UK’s “world-beating fintech sector” has struggled to outlast funding crunches, outdated listings rules and the turmoil spreading from Silicon Valley Bank, the FT reports.

News round-up

Sega Sammy launches €706mn offer for Angry Birds maker Rovio (FT)

ISS urges Barclays shareholders to question board over Staley support (FT)

Rishi Sunak investigated over wife’s financial interest in childcare company (FT)

Dubai court orders KPMG to pay $231mn for Abraaj fund audit failure (FT)

Gates Foundation makes unusual investment in experimental cancer trial (FT)

Glazers confident of Man United stay, aim to double club value (ESPN)