ASDA TO BUY ISSA BROTHERS’ PETROL STATION BUSINESS FOR $4.4B

Asda has struck a deal to buy EG Group’s UK and Ireland gas-station business in a move that aims to create a convenience retailing empire.

The billionaire Issa brothers, Mohsin and Zuber, announced the merger Tuesday for an enterprise value of about £2.27 billion ($4.4 billion), combining two businesses that are both owned by the brothers and buyout firm TDR Capital. The deal will help EG refinance debt coming due in 2025. 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 1000 food-to-go locations.

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 as the second-largest UK grocer and creates one of the biggest privately owned businesses in the UK.

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.

Asda’s shareholders – which include the Issas, TDR and US grocer Walmart – 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. 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, its bonds were hit hard in recent months after investors turned negative on junk-rated companies and in particular on the UK market.

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 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. The deal is expected to close in the fourth quarter.