In these days of spin, leaking and social media guff, it was quite refreshing to be surprised by a business transaction. So, well done to the Issa Brothers, TDR and their advisors in emerging from the back of the runners and riders to capture Asda (subject to regulatory clearance); a month or so ago this would have been a genuine surprise.
The price for the No.2 apparel retailer by volume in the UK, many folks overlook George’s market positioning, and the country’s No.3 grocer was £6.8bn, debt-free and cash-free; just £100m more than those industry legends, Archie Norman and Allan Leighton, sold the business to Wal-Mart for in 1999. Whilst for another time, Asda has been a far from stellar investment for Uncle Sam’s biggest offline retailer, particularly when we take accumulated capital expenditure into account.
So, the Issas’ and TDR appear to have gained Asda for a bargain, c0.3 times (x) sales and an historic EBIT multiple of 8x, lesser still on an EBITDA basis, say 5-6x. Indeed, such has been the challenge by Wal-Mart to exit the UK that it failed to merge with Sainsbury’s and balked several times on an IPO and so it could have been required to retain a stake in the NewCo., which I guess is somewhere between 10-20%.
The deal poses many questions, more so than answers at this stage, as to Asda’s future. The shy Issa brothers are now front and stage of the limelight, reflected in a swathe of press stories chronicling their truly meteoric rise from genuinely humble beginnings through the now global EG (Euro-Garages) Group, which is also 50% owned by TDR, their Asda investment partner. Indeed, current press scrutiny has also revealed no payment of tax to HMRC over the last couple of years by EG.
“The leverage in this deal has permitted the change of ownership but when there is so little equity and so much debt, the lenders have immense final say on matters. As such, rightly or wrongly, it is not unreasonable to sense that the rest of the UK grocery retail trade is also intrigued but not yet losing sleep over the change of ownership in Leeds.”
The new owners state that the future of Asda will be about convenience, online and complementary brands. Scope to progress on these fronts can indeed be envisaged – implanting Asda into the EG estate perhaps, repurposing superstore space with consumer branded partners and centralised urban online fulfilment centres for example – but all this raises the questions of the new team’s capabilities, particularly online, and whether or not all this moves the dial to permit the aspired long-term growth?
Indeed, beyond these plans, there is no doubt more detailed preparatory work within, such as what will the new owners do with George say, two other key questions arise. Firstly, the leverage, debt, could be huge in this NewCo. (£4.0-4.5bn), and how do the new owners plan to address this mountain? In this respect there is an understandable reflection that the business could explore the sale and leaseback of its considerable (75% freehold assets.) Whilst this is so, Asda is a low margin business and to re-engineer in this manner could inject operational leverage into a financially leveraged Group.
In an intense industry, such steps would not enhance Asda’s competitiveness, indeed, it would make it most vulnerable to effectively compete should price activity levels heighten. Hence, a leveraged Asda, even with new agile and innovative entrepreneurs at the helm, would be a benign force for the rest of the trade. In these respects too, where does the Group’s International Produce Limited fall into place, a disposal perhaps?
Secondly, all of which then brings one to the big question as to what ultimately happens to Asda? Do the Issa/TDR buy-out the wantaway American in due course, assuming that the free cash flow is generated and the leverage remains available, noting that this deal is a manifestation of super-low base rates, central banks pumping dosh into the financial system and the need by private equity to deploy enormous volumes of cash.
Additionally, will TDR and the Issas also seek an exit or new structures with which to evolve Asda? So, for example, doing some crazy navel-gazing:
- Will Asda be merged with EG and what will the UK Competition & Markets Authority make of such a move?
- Does acquisition and merger form part of the new Asda owners plans; so say Iceland or B&M European?
- Is an IPO and/or a reverse listing through acquisition on the cards in future?
So, in conclusion, this is a very bold move by the Issas in particular. Their ambition and courage has rarely been questioned, it will now be fascinating to see what they bring to Asda. The leverage in this deal has permitted the change of ownership but when there is so little equity and so much debt, the lenders have immense final say on matters. As such, rightly or wrongly, it is not unreasonable to sense that the rest of the UK grocery retail trade is also intrigued but not yet losing sleep over the change of ownership in Leeds.
Asda has been sold for remarkably low exit multiples for a reason. That’s Asda Price.
Dr Clive Black
Senior Advisor to Coriolis Consulting