Asda plans to generate more than £100 million ($125 million) of synergies from a proposed deal to merge its grocery operations with EG Group’s UK and Ireland gas station and convenience arm, according to an internal document.
(Bloomberg) — Asda plans to generate more than £100 million ($125 million) of synergies from a proposed deal to merge its grocery operations with EG Group’s UK and Ireland gas station and convenience arm, according to an internal document.
The British grocer is anticipating cheaper costs in grocery thanks to combined volumes and selling EG’s food-to-go brands like Leon and Cooplands bakery in Asda stores, the note seen by Bloomberg shows. The document states that the combined entity will have £29 billion of sales and £1.2 billion of Ebitda.
The two businesses, both owned by the billionaire Issa brothers and buyout firm TDR Capital, are being merged to help EG Group refinance debt coming due in 2025. The move means that some borrowings will be loaded onto Asda, which is already leveraged up from its recent multibillion buyout.
A deal with Asda buying the EG operations is likely be agreed by the end of the month, a person familiar with the matter said. The transaction will involve an equity contribution from the Issas and TDR and will see the combined group become one of the biggest privately-owned businesses in the UK with almost £10 billion of real estate, said the person, declining to give the amount of equity involved.
If it goes ahead, the combination will create the UK’s third-largest convenience retailer serving over 20 million customers every week and help Asda in its mission to unseat J Sainsbury Plc as the second-largest UK grocer. The two are currently neck and neck with Sainsbury holding a 14.8% share of Britain’s grocery market and Asda right behind on 14.3%, according to the most recent data from analyst Kantar.
Spokespeople for Asda and EG declined to comment. TDR declined to comment.
Convenience retail is a fast-growing sector in the UK with all the major supermarkets seeking to expand their offering.
EG Group, which also runs convenience stores and gas stations across Europe, Australia and the US, has $8.4 billion debt coming due in 2025. The business has been looking at ways to reduce the borrowings ahead of negotiating a refinancing with creditors. This recently included a $1.5 billion deal to sell and lease back 415 US stores. However, the company will still have to pay $103 million a year to rent them back.
Asda’s 2021 buyout by the Issas and TDR was funded mostly with new liabilities and with a small equity check from the current owners. Previous owner Walmart has kept a minority stake in the business.
While Asda’s debt levels are more manageable than that of EG, its bonds have been hit hard in recent months after investors turned negative on junk-rated companies and in particular on the UK market. News of the potential takeover of EG’s UK and Ireland operations has come as a negative surprise to Asda holders.
Moody’s Investors Service downgraded Asda’s debt to five levels below investment grade yesterday, citing the impact of inflation on the supermarket’s earnings and competition from the discount grocers Aldi and Lidl.
(Updates with person familiar detail in fourth, convenience expansion in seventh.)
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