Walmart Sells U.K. Arm Asda To Britain’s Issa Brothers And Private Equity For $8.8 Billion

Still part of the family, but through a much reduced share. (Photo by OLI SCARFF / AFP) (Photo by … [+] OLI SCARFF/AFP via Getty Images) AFP via Getty Images Walmart WMT has tied up a deal to sell the U.K. supermarket group Asda Group to gas station tycoons the […]

has tied up a deal to sell the U.K. supermarket group Asda Group to gas station tycoons the Issa brothers and private equity firm TDR Capital for £6.8 billion ($8.8 billion) after a merger with Sainsbury was blocked last year.

The transaction—made on a debt-free and cash-free basis—is set to close in the first half of 2021 subject to the usual regulatory approvals. Under the new ownership structure, the Issas and TDR Capital will have majority ownership of Asda through equal shareholdings, with Walmart retaining an ongoing equity investment.

Walmart says that it will have a continuing commercial relationship, expected to be a supply and sourcing arrangement, and it will also retain a seat on the Asda board.

In a statement on the deal, Judith McKenna, President and CEO of Walmart International, said: “We believe it creates the right ownership structure for Asda, building on its 71 year-heritage, whilst bringing a new entrepreneurial flair, not only to Asda, but also to UK retailing. Walmart will retain a significant financial stake, a board seat, and will continue as a strategic partner.”

She went on to praise the U.K. supermarket’s contribution to the world’s biggest retailer, describing Asda as a “powerhouse of innovation for the rest of the Walmart world.”

The Issa brothers are co-CEOs of EG Group, a global convenience and gas station forecourts retailer, headquartered in Blackburn in the U.K. with pro forma revenue in 2019 of almost $30 billion. The Issas founded Euro Garages in 2001, with a single petrol station in Bury, Greater Manchester and now have a diversified portfolio of over 6,000 sites across 10 countries in North America, Europe and Australia.

The acquisition of Cumberland Farms in October 2019, together with the purchase of Certified Oil and Fastrac earlier in the year, added just over 700 convenience locations to EG Group’s U.S. business in 2019.

That global network should give Asda some opportunities to expand its footprint into this channel, where many of its rivals such as Marks & Spencer Simply Food, Morrisons, and Sainsbury have previously entered the market but with mixed success.

Talking to the BBC this morning, Catherine Shuttleworth, CEO and founder of retail marketing agency Savvy, said: “It’s great to see two British entrepreneurs, new to the supermarket sector, taking it on. We should expect to see them take Asda into more convenience and food-to-go operations which is where the market is moving to.”

Stepping into more retail channels

The Issas, backed by TDR Capital, are buying Asda at a time when the U.K. food retail sector has been seeing rapid change thanks to Covid-19 and a surge in the take-up of online ordering according to analysts such as Kantar and Nielsen. Under CEO Roger Burnley, Asda has almost doubled its online operations during the Covid-19 pandemic.

Brothers Mohsin and Zuber Issa said: “We are very proud to be investing in Asda, an iconic British business that we have admired for many years. Asda’s performance through the Covid-19 pandemic has demonstrated its fundamental strength and resilience.”

With a fresh injection of capital of £1 billion over three years, the new owners have pledged to accelerate Asda’s existing strategy of delivering low prices and convenience, but also taking the supermarket chain into new channels to serve a wider base of U.K. shoppers.

A bigger omnichannel offer will be part of the strategy—not a surprise since grocery has seen the biggest increase in online shopping versus other retail sectors. Making Asda’s supply chain more resilient is another aim and that will include sourcing more food from U.K. farmers—particularly for chicken, dairy, wheat and potatoes—as part of a general move towards supporting domestic suppliers and small businesses.

A choice of up to 6,000 new retail sites

Asda’s aim now is to create a differentiated operating model to drive growth in the highly-competitive British grocery sector where discount retailers like Lidl and Aldi have been star performers.

Data from last year show that Britain’s ‘big four’—Asda, Morrisions, Sainsbury and Tesco—saw their market share slide to a 15-year low against the German rivals. The Issa brothers will bring to the table their convenience retail and brand partnerships experience built across their 6,000 convenience sites, some of which might be useful for Asda’s expansion. Partner brands include Burger King, KFC, Starbucks
and Subway.

Asda’s CEO Roger Burnley is optimistic about the new era: “With our combined investment, expertise and ambition; Asda, Walmart, the Issa brothers and TDR have an incredible opportunity to accelerate our existing strategy… and create significant, additional opportunities to drive growth.”

Gary Lindsay at TDR Capital added: “Asda is a strong and well-managed business. Mohsin and Zuber have built EG Group into a global convenience retailer and will now bring that experience to bear at Asda. We look forward to supporting them and drive long-term sustainable growth.”

In a SEC filing, Walmart notes that based on the current deal terms it expects to recognize a non-cash loss of approximately $2.5 billion, after tax, in fiscal 2021. “This estimate could fluctuate due to changes in currency exchange rates and purchase price adjustments up to the closing date of the transaction,” the statement said.

In addition, this estimate does not include amounts related to Asda’s pension plan settlement. Walmart expects earnings per share dilution of approximately $0.25 in the first full year following completion of the transaction, primarily reflecting the absence of net income associated with the Asda business.

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