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Mohsin and Zuber Issa were looking like the cleverest men in retail.
A little over a year ago, the billionaire brothers and buyout firm TDR Capital agreed to acquire a majority stake in Asda Group Ltd from Walmart Inc, in a deal valuing the British supermarket at 6.8 billion pounds ($9.4 billion). This summer they sold the grocer’s distribution centers for much more than the expected 1 billion pounds. Since the brothers and TDR committed relatively little equity — together they put in 780 million pounds — they have already realised significant value from selling the in-demand properties.
But last week, the new owners suffered a setback. It’s a reminder that they may not be able to count on everything going their way in a UK supermarket frenzy.
EG Group, the fuel-station operator that the Issas and TDR also own, said it would not be going ahead with a plan to buy Asda’s fuel stations for the 750 million pounds they’d agreed to as part of the buyout in February. That’s bad news for Asda, as the proceeds from the sale were needed to pay off a bridging loan taken on to finance the deal.
Consequently, Asda is looking to raise the equivalent of another 500 million pounds of debt, according to Bloomberg News. This, together with about 262 million pounds of cash from Asda’s balance sheet, will be used to pay off the bridging loan plus fees.
The collapse of the transaction — which EG blamed on not being able to get a handle on the finer details of the business until the summer because of competition constraints — means Asda’s leverage will be higher. Bellis Finco Plc, the Issas’ and TDR’s buyout vehicle, currently has almost 4.4 billion pounds of bonds and loans outstanding, according to Bloomberg. Moody’s downgraded its debt further into junk territory, although it left the outlook as stable. Asda is highly cash generative. It made more than 1 billion pounds in cash from operations in the year to December 31, 2020. The Issas and TDR also have more room for manoeuvre after selling the distribution centres, although they now have to pay rent on these properties.
Nevertheless, the added debt is a worrisome development: One of Britain’s biggest supermarkets will be enduring the most challenging trading environment in living memory, characterised by food price inflation and labour shortages, with significant borrowings. With Asda and Wm Morrison Supermarkets Plc in private hands, bigger rival Tesco Plc or one of the German discounters, Aldi and Lidl, may be tempted to start a price war. If this happens, Asda could have less firepower to respond.
—Bloomberg