Following weeks of speculation, the owners of Asda and the EG Group are said to be close to confirming a £10bn merger of the two businesses, potentially putting them in a better position to service their large debts.
A report by Sky News suggested that the Issa brothers and TDR Capital could announce a deal as early as today that will create a retail behemoth with close to 2,000 sites and annual revenues of nearly £30bn.
The enlarged group is expected to use the deal to accelerate Asda’s drive into the convenience sector, with the EG Group already rolling out Asda stores on its forecourts.
“Having a bigger and better convenience proposition across such a vast network and utilising Asda’s brand positioning makes enormous sense during a cost-of-living crisis,” said one rival retail executive quoted by Sky News.
According to banking sources, Apollo Global Management has been lined up to provide more than £500m of private placement debt to finance the deal between Asda and EG UK. Past reports have suggested that there could be more than £100m of synergies between the two businesses.
The merger is expected to be structured as an acquisition of EG UK by Asda, with the proceeds used to help EG reduce its onerous debt burden.
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 forecourt business, while Asda has also been squeezed by rising costs on energy, wages and its products in a tough consumer market.
The deal 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 scrutinised 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.
In recent weeks, the GMB union, which represents thousands of Asda staff, has called on the government to block the anticipated merger, arguing it will be bad for consumers and workers.
Nadine Houghton, GMB organiser, said: “GMB believes this merger requires proper scrutiny from the CMA. We are concerned rising interest rates will leave the debt of the UK’s third-largest retailer unsustainable. GMB’s priority is to protect and improve our members’ jobs and conditions, and we believe this merger makes that harder.”
EG is expected to retain its headquarters in Blackburn from where it will operate its international business, which includes forecourts in the US and across Europe, while Asda will continue to be based in Leeds.
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…
