Asda has entered into an agreement to purchase the UK and Ireland service station business of EG Group, aiming to establish a dominant presence in convenience retail. The merger, announced by billionaire brothers Mohsin and Zuber Issa, who own both Asda and EG Group along with buyout firm TDR Capital, carries an enterprise value of approximately £2.27 billion ($4.4 billion). By combining their businesses, the Issa brothers plan to refinance EG’s debt that is due in 2025.
Reports from Bloomberg News in late 2021 initially unveiled the brothers’ exploration of options for EG Group, including a potential merger with Asda. The deal encompasses around 350 petrol stations and over 1000 food-to-go locations. The resulting company will generate an annual revenue of about £30 billion and serve more than 20 million customers per week. This strategic move also aids Asda’s goal to surpass J Sainsbury as the UK’s second-largest grocer, while simultaneously establishing one of the largest privately owned enterprises in the country.
EG Group, which originated with a single filling station in Blackburn, has rapidly expanded through debt-funded acquisitions in recent years, evolving into one of the world’s largest independent chains of gas stations and convenience stores. Additionally, EG owns the restaurant chain Leon, and as part of the merger, Asda intends to incorporate Leon outlets into its stores. Furthermore, Asda Express will be introduced at EG locations.
To fund the transaction, Asda’s shareholders, including the Issa brothers, TDR, and US grocer Walmart, will provide approximately £450 million of equity. The remaining funding will consist of £770 million in term loans and property-related transactions totaling about £1.1 billion. Notably, the deal will not impact Asda’s freehold value since EG UK and Ireland possess most of the £1.2 billion estate.
However, Asda is already burdened with substantial debt following its recent multibillion-pound acquisition and may face additional pressure on its credit rating. While Asda’s debt levels are more manageable than EG’s, its bonds have experienced significant decline due to negative investor sentiment towards junk-rated companies, particularly in the UK market.
This merger will bolster Asda’s financial position, adding approximately £195 million of earnings after rent and around £100 million of synergies over the next three years. Asda will commence the search for a new CEO, while Mohsin Issa will continue to oversee the company. As part of its expansion plans, Asda also intends to appoint additional non-executive directors to its board.
With over £8.16 billion in debt, EG had been exploring ways to reduce its liabilities, particularly as a substantial portion of its borrowings become due in 2025. In March, EG agreed to a sale-and-leaseback arrangement for some of its US stores, generating net proceeds of $1.4 billion. Following the merger with Asda, EG expects the ratio between its profits and net liabilities to fall below 5 times.
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