Asda’s owners recycle proceeds of earlier deal to fund EG takeover

Asda’s owners are using the proceeds of an earlier asset sale to fund their contribution to the supermarket’s takeover of parts of EG Group, another business they own, in the latest example of financial engineering that has allowed them to limit their cash outlay on the business.

Earlier this week, Asda announced a £2.3bn deal to buy the UK and Irish operations of petrol station business EG Group. Both companies are jointly owned by British businessmen Mohsin and Zuber Issa and private equity firm TDR Capital.

The deal to take over 350 petrol stations and more than 1,000 food outlets — EG operates some outlets like Starbucks and KFC and owns others such as Leon — will be largely funded through debt and property sales. The Issa brothers and TDR also said they would contribute “£450mn of additional equity” towards the transaction.

The company later confirmed to lenders that this equity was the proceeds of an earlier real estate transaction, however, according to people familiar with the discussions. Mohsin Issa told reporters on a call this week that the equity was “sort of in the business today”.

TDR and the Issa brothers funded £950mn of their £6.8bn acquisition of Asda in 2021 through a sale and leaseback of its warehouse network. US investor Blackstone bought the property portfolio for £1.7bn, creating a windfall for the owners that is the source of the £450mn of equity.

EG Group declined to comment. Asda said the EG deal was about “driving growth, providing value to customers and creating a stronger, more diversified business”.

“Asda will have a sustainable capital structure, strong cash generation capabilities and clear strategy to grow ebitda, which, all combined, will enable Asda to reduce its debt over time,” the company added.

The Financial Times revealed in April that the Issa brothers and TDR contributed just £200mn of fresh cash towards the Asda buyout in 2021.

While the latest deal will help EG cut its $9bn debt pile, Lord Stuart Rose, who chairs both businesses, said the main driver was to turn Asda into a “UK retail champion” and rejected suggestions that the transaction was driven by financial engineering.

Both EG and Asda’s bonds rallied when the terms of the deal were unveiled on Tuesday because many investors had expected more new debt to be issued by the supermarket to fund the transaction.

For Asda’s bondholders, the £450mn still represents a fresh cash injection because the warehouse assets sat outside the group that they financed.

The credit arm of US private equity firm Apollo also lent Asda £770mn to fund the deal.

The floating rate loan has an annual cost of more than 11 per cent at present interest rates, while Apollo also received the debt at discount to face value, further increasing its returns.

The US investor was already a lender to both Asda and EG Group, according to people familiar with the details, meaning it will benefit from the repayment of EG debt.

Amarveer Singh, a senior analyst at CreditSights, said in a note this week: “The new equity money was a surprise and serves as a favourable signal to investors, while the fairly long six-year maturity of the (understandably expensive) term loan provides some refinancing breathing room for the existing bonds maturing in 2026 and 2027.”