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TDR Capital’s £6.8bn acquisition of ASDA

By Greis Gaeta, Riccardo Colombo, Federico De Rosa, Lorenzo Mirone (Bocconi University), Jonathan Fuchs and Chiara Fulvi (LSE)


Overview of the deal

Acquirer: TDR Capital, Issa brothers

Target: Asda

Total Transaction Size: £6.8 Bn

Walmart, after a lengthy auction process, has reached an agreement with the Issa brothers, billionaire owners of the oil company EG Group, and the private equity group TDR Capital for the sale of Asda, which for the first time in 21 years will return to British ownership. The terms of the agreement will guarantee the US retail giant an income of £6.8 billion.

Under the new ownership structure, the majority stake in Asda will be held by the brothers Issa and TDR Capital, while Walmart, which has owned Asda since 1999, will retain a minority stake, but the exact share has not been disclosed.

According to the agreement, Asda's headquarters will remain in Leeds; support will be provided to the existing management, there will be an ongoing business relationship and salaries for staff will be maintained at an appropriate and competitive level.

Finally, Walmart will continue to have one person on the Asda Board of Directors.

The goal of this deal is to strengthen Asda's business and its supply chain, with a particular focus on online operations, while maintaining a strong customer relationship. This will be possible thanks to the new entrepreneurial momentum that can be achieved through this agreement.

This new ownership opens an exciting new chapter in Asda’s long heritage of delivering great value for UK shoppers” - R.Burnley, Asda CEO

Company Details: Acquirer – TDR Capital

TDR Capital is a leading private equity firm with over €8 billion in committed capital. The company invests in the logistics, food retail, insurance, and construction industries. The company counts 115 investments since its inception, including a significant stake in Pizza Express.

Founded in 2002, headquartered in London, United Kingdom

Founders: Stephen Robertson, Manjit Dale

Number of employees: 60

Market Cap: no data (privately held)

EV: no data (privately held)

LTM Revenue: £76.2 million

LTM EBITDA: no data (privately held)

LTM EV/Revenue: no data (privately held)

LTM EV/EBITDA: no data (privately held)

Company Details: Target - Asda

Asda is one of the biggest supermarket retailers in the UK. The company operates three types of stores catering to different segments of consumers: standard stores, Asda-Walmart supercentres, and Asda Fresh stores. Currently, 60% of the retailer’s revenues come from grocery items.

Founded in 1949, headquartered in Leeds, United Kingdom

CEO: Roger Burnley

Number of employees: 165,000

Market Cap: no data (subsidiary)

EV: no data (subsidiary)

LTM Revenue: no data (subsidiary)

LTM EBITDA: no data (subsidiary)

LTM EV/Revenue: no data (subsidiary)

LTM EV/EBITDA: no data (subsidiary)

Projections and Assumptions

Short-term consequences

Charlie O'Shea, one of Moody’s Senior credit officer, indicated the deal as a way for Walmart to focus on other international markets with higher future possibilities of success such as India and China. However, Walmart’s management has expressed interest in following Asda’s future path as it has always been an innovator inside the group. New owners are keen on widening the shopper base in the UK together with a 1.3 bil$ investment into the business and supply chain in the next three years, which includes support for local farmers and domestic suppliers. The business’ philosophy with particular attention on operational excellence and commitment to communities is considered fundamental by the new owners, in addition to following a new path driven by customer serving. The partnership in the acquisition with TDR Capital, a London PE Firm, is going to accelerate this growing strategy delivering value to customers. The challenge for the future is represented by the competition with German discounts Aldi and Lidl and other large UK retailers. Moreover, EG group, with the abilities of the Issa brothers, must generate higher same-store sales and cash flows per square foot on a regular basis to consider the deal successful, as stated by Clive Black, retail analyst at Shore Capital.

Long-term Upsides

With Walmart investing in faster-growing ventures in India and China, this is just another deal on Walmart’s road towards a greater focus on its home market as well as regions with greatest potential for growth. Indeed, accounting for just one twenty-fifth of overall Walmart’s sales volume, Asda was on the list of companies to sell in order to ensure greater business concentration, necessary for Walmart to be able to pursue its goal of building a larger online and digital business as well as expanding its grocery operations in its home market, the United States.

Expected to be completed in the first half of 2021, the deal is a great opportunity for Asda’s long-term growth in the UK grocery market. Indeed, with more than £1bn promised to be invested by the acquirors over the next three years, we expect great improvements in the target’s existing strategy as well as its customers’ offers. Of course, in the long-term the deal will benefit the acquirors as well, TDR and Issa Brothers. In particular, Asda’s great online capacity, with a projected increase to one million weekly slots in 2021 from an expected 740,000 by the end of this year, will contribute to their expansion in the online food shopping sector. Finally, in the long-term the two companies are also expected to well integrate thanks to their similar cultures, both based on customer-centric philosophy, focus on operational excellence and commitment to the communities.

Risks and Uncertainties

It remains uncertain whether the Issa’s will be able to make ASDA more competitive. Having previously only grown capital-light, repeatable businesses such as Subway, EG and Spar, scepticism about their ability to turn around a complex supermarket chain with more than 500 stores prevails.

Furthermore, the UK’s Competition and Markets Authority (CMA) might intervene. The CMA previously blocked J Sainsbury’s attempt to acquire ASDA in 2019, basing their argument on a reduction in competition between petrol stations in 127 local areas. ASDA would add more than 320 petrol stations to EG’s existing portfolio of 396, which will probably lead to a similar reduction in local competition. Therefore, the CMA may ask the Issa’s to divest petrol stations in areas ASDA’s and EG’s stations overlap.

Finally, EG’s credit rating has suffered from the pandemic and will probably suffer further as some analysts believe the Issas not to have enough cash to fund the deal. They might have to pledge some of their equity in EG to fund their investment, thereby increasing the risk of EG’s debt.

“Even Walmart didn’t do well with Asda - that’s a big red flag” - Unnamed Debt Analyst
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