Issa Brothers' Purchase of Asda

The Background

2018

Asda proposed a merger with Sainsbury’s with a view to lower costs, increase the range and quality of products, and increase convenience for customers. Costs would arguably be lowered on account of sourcing UK-based products which would result in a reduction in import fees for the company. The quality and range of products would increase through an expansion of high / low-end products on offer, on account of a combination of Asda (a company that promotes the catchphrase “saving you money every day”), and Sainsbury’s, which provides a more expensive “Taste The Difference” range of food and drink items. The proposed merger also aimed to push a rapid growth of the company in order to become a major competitor of the bargain-focused, multinational retailers, Aldi and Lidl. It appears that the key motivation behind the Asda / Sainsbury’s merger was one which promoted a pro-competitive environment for the UK grocery market; one which supported UK-based suppliers and competed against multinational competitor retailers.

Asda / Sainsbury’s Merger Blocked

2019

In the Competition and Markets Authority’s (CMA) final report on the 25th April 2019, it concluded that customers would in fact experience no benefit from the proposed merger. The CMA theorised that the merger would create a monopoly in the food retail sector, meaning that the Sainsbury’s / Asda super retailer would have major (and possibly problematic) purchasing influence over suppliers. If one considers one of the key proposed benefits of the merger - product cost reduction - one has to examine how exactly the retail giant could sustainably reduce the prices. It appears that a reduction in price at the consumer level would have to be mediated by a reduction in price at supplier level. A merged Asda / Sainsbury’s would utilise its monopoly in the retail sector to force ground-level supplier prices down in order to maintain lower consumer costs. Although this seems beneficial to the consumer, the CMA addressed the fact that reducing product costs would not be beneficial, and potentially fatal, to suppliers. The CMA concluded that the merger would in fact reduce competition rather than create the “pro-competitive environment” suggested by Asda, and eventually lead to price increases, reductions in the quality and range of products available, and an overall poorer shopping experience for consumers.

Issa Brothers Buy Asda in £6.8bn Deal

2020

Zuber and Mohsin Issa and private equity firm TDR bought a majority stake in Asda in October 2020. For some background information, the Issa brothers own the EG (Euro Garages) group which hosts convenience stores such as Spar and Carrefour. It is known that Walmart will maintain a minority share in the group. So how did the Issa brothers fund a £6.8bn deal? The brothers and TDR will pay £780m in equity for a majority stake in the group. £500m is maintained in equity from Walmart’s minority stake. The remaining £6.5bn is to be sourced from junk debt (up to £4bn in high-yield bonds and leveraged loans led by Barclays) and the selling of a section of Asda’s assets (selling of Asda’s petrol stations to the EG group and a £950m payout from a sale-and-leaseback on Asda’s warehouses. Following this deal, having raised one of the largest-ever sterling junk bonds, it appears that the Issa brothers have plans to open B&Q shops in Asda supermarkets. This points to the positioning of Asda group as a central hub for retail partnerships.

Why should we care?

There are three elements to the trajectory of this deal that point to interesting and unpredictable activity in the merger and acquisitions side of business:

1. The blocking of the original Asda / Sainsbury’s merger in 2019 established an upper limit to the CMA’s tolerance of monopoly in the retail sector. There are already living examples of business monopolies in the UK, such as Royal Mail and Walkers Crisps. By blocking the merger with little room for readjustment of the terms and structuring of the merger, it appears that the CMA has established a rather ‘firm hand’ in comparison to previous retail mergers such as Boohoo’s acquisition of Debenhams.

2. The method of funding the acquisition by the Issa brothers marks a real change in direction for M&A practice. The majority debt-funded acquisition suggests that the big business buying can be achieved by smaller, less reliable, companies on account of assurance from the acquisition company. Asda’s history of little-to-no debt in its practice, paired with the little effect the Covid pandemic has had upon supermarkets, points towards a strong business model which can regain its strength even when backed by debt-based funding.

3. The acquisition of an historically British brand by two British brothers points towards a much-needed move towards home-based retail and production models following the UK’s exit from the European Union. By reclaiming British businesses, the UK market can create more leverage in the production and selling market, which had dwindled over the past few decades.

Sources

1. Asda, Proposed Sainsbury’s and Asda Merger (2018), available here, accessed 15/03/2021.

BBC News, Sainsbury’s-Asda merger blocked by regulator (25/04/2019), available here, accessed 16/03/2021.

2. Asda bought by billionaire Issa brothers in £6.8bn deal (02/10/2020), available here, accessed 16/03/2021.

3. Financial Times, Walmart sells majority stake in Asda (02/10/2020), available here, accessed 16/03/2021.

4. Buying Asda: how petrol station billionaires plan to pull off the deal (23/10/2020), available here, accessed 16/03/2021.

5. Private equity: how to buy a £6.8bn company for less than £800m (04/02/2021), available here, accessed 16/03/2021.

6. Billionaire Asda buyers raise £2.75bn in record sterling junk bond sale (11/02/2021), available here, accessed 16/03/2021.

7. GOV.UK, CMA blocks merger between Sainsbury’s and Asda (25/04/2019), available here, accessed 15/03/2021.

8. Red Flag Alert, Sainsbury’s-ASDA Merger: What Will It Mean for Suppliers?, available here, accessed 16/03/2021.

9. Retail Gazette, Sainsbury’s & Asda merger blocked by the CMA: What the experts say (25/04/2019), available here, accessed 16/03/2021.