Asda's deal to buy the vast majority of EG Group's UK and Ireland operations in a deal worth over £2bn looks set to be one of the largest acquisitions of the year.
The deal had been rumoured to have been in the works since January with sources telling BusinessLive at the end of last week that an announcement was expected after the Bank Holiday weekend.
Now the news has been made public, questions have arisen over what it could mean for prices at Asda, jobs at both companies and what the future EG Group will look like.
READ MORE: Click here to sign up to the BusinessLive North West newsletter
Below, BusinessLive has taken a look at the deal in depth, the major players involved and what it could mean for each company and their customers.
The deal
As announced on Tuesday morning, Asda is to buy the majority of EG Group's UK and Ireland operations for almost £2.3bn.
Both companies are owned by the billionaire Issa brothers and private equity giant TDR Capital. Former Asda owner Walmart retains a stake in the supermarket.
Asda will acquire Blackburn-headquartered EG Group's fuel, foodservice, grocery and merchandise business which consists of around 350 petrol stations and over 1,000 food-to-go locations.
It will buy the assets through an affiliate of its parent company, Bellis Acquisition Company 3 Limited, a wholly-owned subsidiary of Asda.
The deal will be funded by a combination of debt and equity, including c.£450m of equity being provided by Asda's shareholders, £770m of term loan debt, as well as c.£1.1bn from property related transactions.
Asda makes prices promise
Lord Stuart Rose, who chairs both Asda and EG Group, as promised that food prices will not go up because of the deal.
Lord Rose said that the supermarket group would need to remain competitive, because if not it would risk its ability to attract customers.
"It will not lead to higher prices as a result of this transaction, that is rubbish," he told reporters on a call following the deal.
"We will be what we aim to be and what we’ve always been – a highly competitive player in the sector.
"And that’s the only way that you will attract, retain and grow with customers."
Debt a major factor
One of the main reasons why this deal has been made is because of EG Group's debt burden.
The business has heavy debts and has said that it would use the £2.27bn from selling its UK arm, as well as the £1.1bn it gained from a deal in the US, to pay down what it owes.
But speaking to reporters, Lord Rose and Mohsin Issa tried to bat away concerns that the deal was simply moving debt from EG Group to Asda.
Lord Rose said: "The primary driver of this deal was creating a business, which is a different business and a multi-channel champion to what we were able to do before by bringing in convenience, etc, etc, and scaling up with opportunities.
"Now, if as a consequence of that, you’ve also got the opportunity of deleveraging on the upside, then what’s wrong with that?"
EG has a debt pile of around £7bn, according to reports.
Its net leverage will fall, meaning the amount of debt it has will be less than five times higher than its earnings before interest, tax, depreciation and amortisation (EBITDA).
But the GMB union has previously said the deal risks lumping part of that debt on to Asda, which already owes around £4.7bn.
Orwa Mohamad, an analyst at Third Bridge, said: "Our experts believe the primary driver of the deal is the need for debt refinancing.
"The merger appears to be the most logical option when weighed against the costs associated with alternative actions. Without this merger, EG Group would have to either refinance its debt in considerably more expensive debt markets or opt for listing on the equity markets, albeit at a lower valuation than the potential that could be attained.
"The hurdle following the merger lies in the realm of culture and mindset. EG operates under a highly acquisitive business model, resulting in the existence of multiple systems within the group. Incorporating Asda would only further compound this complexity.
"Asda and EG can undoubtedly derive advantages from a geographical standpoint, purely in terms of their presence. The merged entity would witness a noteworthy improvement in product offerings and consumer experience, surpassing several peers and competitors operating in their respective markets.
"The transition to electric vehicles (EVs) poses both a threat and an opportunity for EG. According to our experts, consumers tend to spend more time on-site while waiting for their EVs to charge. This presents a lucrative opportunity for the business to capitalize on the retail side and generate significant profits."
Job cuts not ruled out
Both Asda and EG Group hope to make synergy savings of around £100m from the deal over the next three years, largely through the combined group's size.
It did not announce any job cuts but did not rule them out.
"We’re going to evaluate, we’ve not gone into that detail today," Mr Issa said.
"We’ll look at skill sets. There’s complimentary skill sets. There’s not much of an overlap, in terms of Asda runs big boxes, EG runs convenience stores and food service outlets so the overlap is very, very minimal. So we’ll look at that and see where we go from there."
The combined group
The combined company is expected to be worth around £10bn, have revenues of around £30bn and employ in the region of 170,000 people.
Lord Rose said: "Asda’s acquisition of EG UK and Ireland will create a consumer champion like the UK has never seen.
"Throughout my career in retail one thing has always been true – that meeting the evolving needs of customers is the route to growth.
"This transaction is all about driving growth by bringing Asda’s heritage in value to even more communities and accelerating the growth of its convenience retail business."
Mohsin Issa said: "Asda is committed to saving customers precious time and money across their shopping baskets and on the forecourt.
"The combination of Asda and EG UK&I will be positive news for motorists as we will be able to bring Asda’s highly competitive fuel offer to even more customers."
Following completion of the deal, Asda plans to invest more than £150m within the next three years to fully integrate the combined business.
Mohsin Issa will continue to lead Asda while a search for a chief executive will continue.
Speaking to reporters, Mr Issa added that the combined group will be "on par" with Sainsbury's which is currently the UK's second-largest supermarket.
He added that Asda now has plans to overtake Sainsbury's in the future.
EG Group's future
When the deal is completed, EG Group said it will generate over $25bn of annual revenue and more than $1bn of EBITDA, across 5,500 locations.
It will retain the Cooplands bakery business and certain other foodservice brands.
It will continue to operate in the USA, Australia, Germany, France, Italy, the Netherlands, Luxembourg and Belgium, while also retaining around 30 UK sites – including the first Euro Garages site in Bury – which are close to the group headquarters.
The Waterside offices in Blackburn will remain as the global headquarters and shared service centre for the group.
In March, BusinessLive reported that profits at EG Group, which the brothers also own alongside TDR Capital, increased to almost $1.5bn during 2022.
EG Group posted an EBITDA of $1.46bn on a constant currency basis, up by 1.9% compared to 2021.
The group's turnover also jumped by 25.1% to $33.04bn thanks to the contribution of acquisitions such as Cooplands.
The Issa brothers
Mohsin and Zuber Issa started out with a single petrol station forecourt in Bury, Greater Manchester more than 20 years ago.
The brothers built their business into global group which has 350 petrol stations and 1,000 food-to-go sites in the UK and Ireland alone.
They acquired Asda in a £6.8bn deal alongside private equity firm TDR Capital in 2021.
According to the latest Sunday Times Rich List, the brothers saw their wealth rise by £302m to £5.05bn over the last year.
For more news about the Issa brothers, click here.
TDR Capital
TDR Capital is a European private equity firm with over €15bn of assets under management.
Founded in 2002, TDR typically acquires majority stakes in companies. It has managed five European mid-market buyout funds and has a team of around 80 employees.
It is currently managing assets across four European mid-market buyout funds, from the main office in London.
The Advisors
Financial: Rothschild & Co, Barclays, PJT Partners, JP Morgan, Morgan Stanley.
Legal: Kirkland & Ellis, Addleshaw Goddard, Latham & Watkins, A&O (lender counsel).
Property: Eastdil Secured, Barclays, Rothschild & Co.
Financial, tax and structuring due diligence: PwC.
Independent financial advisor to Asda's board: Lazard.
Addleshaw Goddard advised Asda alongside Kirkland & Ellis and Latham (financing). The AG team was led by Georgina Powling, commercial services partner and co-head of IP, and Joe Maitland, real estate partner.
Skadden advised EG Group.
READ MORE:
