Asda agreed to buy EG Group’s UK and Ireland gas-station business in a move that aims to create a convenience retailing empire in one of the world’s most competitive food markets.
(Bloomberg) — Asda agreed to buy EG Group’s UK and Ireland gas-station business in a move that aims to create a convenience retailing empire in one of the world’s most competitive food markets.
The billionaire Issa brothers, Mohsin and Zuber, announced the merger Tuesday for an enterprise value of about £2.27 billion ($2.8 billion), combining two businesses that are they both own with buyout firm TDR Capital. The deal will help EG refinance debt coming due in 2025.
The combination creates a convenience company with annual revenue of about £30 billion, serving more than 20 million customers every week. It also helps Asda in its mission to unseat J Sainsbury Plc as the second-largest UK grocer and forms one of the biggest privately owned businesses in the country.
Bloomberg News first revealed in late 2021 that the brothers were exploring options for EG Group and considering a potential merger of its operations with Asda. The deal consists of around 350 petrol stations and more than 1,000 food-to-go locations.
Read more: UK Gas Station Tycoons Consider Merger of Asda, EG Group
Prices at Asda won’t rise as a result of the deal, Chairman Stuart Rose said on a call with reporters on Tuesday. EG forecourts will switch to the Asda brand over time and petrol prices will come down in line with the grocer’s prices, said Moshin Issa, co-owner of Asda.
“The DNA of this business is about value and we are not here to rip the heart out of the DNA,” he said. “We’re here to enhance it.”
EG started with a single filling station in Blackburn, an old cotton-mill town in northern England. It has grown rapidly through a series of debt-funded acquisitions in the past few years to become one of the world’s largest independent gas-station and convenience-store chains.
EG also owns restaurant chain Leon, and as part of the deal, Asda will add Leon outlets to its stores. Asda Express will be rolled out across EG sites.
When asked whether other parts of EG will be sold, Rose said after this deal it will be “business as usual” at the rest of EG, combining fuel with convenience and food outlets.
Asda’s shareholders — which include the Issas, TDR and US grocer Walmart Inc. — will provide around £450 million of equity to help fund the transaction. It will also be funded with £770 million of term loans and about £1.1 billion of property-related transactions, mostly sale and leaseback operations on Asda stores. The deal won’t impact Asda’s freehold value as EG UK and Ireland owns most of its £1.2 billion estate.
Still, the grocer is already heavily indebted after its recent multibillion buyout and could see more pressure on its credit rating. While Asda’s debt levels are more manageable than EG’s, its bonds were hit hard in recent months after investors turned negative on junk-rated companies and in particular on the UK market.
“The business will grow, debt over time will come down and we believe the capital structure is absolutely appropriate,” said Rose, who is chairman of both Asda and EG.
The deal will strengthen Asda’s balance sheet, adding about £195 million of earnings after rent, and about £100 million of synergies over the next three years. Asda will search for a new chief executive officer while Mohsin Issa continues to oversee the company, which also plans to hire additional non-executive directors to its board.
Debt Refinancing
EG had been looking for months at ways to lower its debt of more than £8.16 billion, in order to have a more manageable amount of liabilities as the bulk of the borrowings come due in 2025.
In March, EG agreed on a sale-and-leaseback of some of its US stores for net proceeds of $1.4 billion. Following the deal with Asda, the ratio between EG’s profits and its net liabilities will drop below 5 times, EG said.
EG’s euro bonds were up by 2.3 cents to 97, reaching their highest levels since May 2022.
Asda’s 3.25% bonds due in 2026 gained 1.7 penny to around 86, according to CBBT data compiled by Bloomberg. The securities are quoted still below levels seen in January, before the deal with EG was floated again.
The deal is expected to close in the fourth quarter.
(Updates with details from media call from fifth paragraph.)
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