Following months of speculation, Asda has announced today that it will buy forecourt operator EG Group’s UK and Ireland business to accelerate its move into the convenience sector, creating a company with combined revenues of nearly £30bn.
Asda, owned by the Issa brothers, TDR Capital and Walmart, is acquiring a business consisting of around 350 petrol filling station sites and over 1,000 food-to-go locations – through an affiliate of its parent company, Bellis Acquisition Company 3 Limited, a wholly-owned subsidiary of the supermarket. The deal values EG UK and Ireland at £2.27bn, including debt.
EG Group will retain approximately 30 sites in the UK for “wider group development” and these will not form part of the transaction.
The firms stated that the combination of the two businesses would allow Asda to better serve a combined base of around 21m customers each week, as well as leveraging the supermarket’s growing loyalty scheme and bringing together convenience, fuel, GM, grocery, foodservice and omni-channel retailing.
Following the completion of the deal, Asda plans to invest more than £150m over the next three years to integrate the businesses. As part of the transaction, Asda’s shareholders are providing around £450m of additional equity to fund the transaction.
The acquisition is expected to strengthen Asda’s financial profile with the contribution of around £195m EBITDA after rents, with additional P&L synergies estimated at £100m over the next three years. The group noted that these synergies would mainly arise through economies of scale of the combined entity, higher volumes and cross-selling opportunities. Asda also expects to realise over £100m of working capital benefits as a result of its enlarged scale.
Retail analyst Richard Hyman predicted job cuts at a senior level would follow. “It was inevitable the Issa brothers would want to consolidate assets they already own,” he said. “They’re financially aggressive owners and operators, the only reason they’ll be doing this is to cut costs.”
Asda stated that the enlarged business would be “better placed to benefit from highly attractive structural drivers behind the convenience and foodservice markets.”
At the end of last year, Asda launched its new Express convenience format as part of a long-term strategy to become the UK’s second-largest grocery retailer by establishing a significant presence in the channel. Asda hopes to have 30 Express stores operating by the end of this year and 300 sites by the end of 2026.
The Express stores are wholly owned and operated by Asda. They are separate from the Asda On the Move convenience sites, which are located on forecourts and operated by EG Group. The 150th Asda on The Move store opened in Bicester last month.
Stuart Rose, Chair of Asda, commented: “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.”
Gary Lindsay, Managing Partner at TDR Capital, added: “The combination of Asda and EG UK&I creates a convenience and food retailing champion, with nearly £30bn in annual revenues. The two businesses are highly complementary, bringing together Asda’s traditional focus on mid-to-large sized supermarkets and EG UK&I’s on convenience retail, foodservice and fuel.”
The transaction is expected to close in the fourth quarter of this year.
Talks about a potential deal have been underway for months as the cost of servicing billions of pounds worth of debt held by EG and Asda have surged due to rising interest rates. About £7bn of EG’s debt is reportedly due to be repaid in 2025, piling pressure on the international forecourt operator, while Asda has also been squeezed by rising costs on energy, wages and its products in a tough consumer market. EG will use the proceeds from the sale to help pay down debt, following a separate deal involving its US operations earlier in the year.
The transaction is not expected to be scrutinised by the Competition and Markets Authority (CMA), which already considers the two businesses as one because of their shared ownership. The regulator examined the implications of Asda and EG being controlled by the same shareholders when the supermarket chain was acquired by the Issa brothers and TDR for £6.8bn in 2020.
Asda also today gave an update on its recent trading amid evidence that it is regaining market share following improvements in its offer. Like-for like sales increased by 7.8% in the three months to the end of March compared, while total revenues excluding fuel increased by 8% to £5.0bn.
NAM Implications:
- Two advantages:
- £100m synergies
- £30bn sales vs Tesco £57bn
- i.e. extra buying power…
- But still eye-watering debt, with onerous servicing and repayment burdens.
- You have been warned…
