A daring high-wire act: Inside the Asda buyout

This is an audio transcript of the FT News Briefing podcast episode: ‘A daring high-wire act: Inside the Asda buyout’

Marc Filippino
Good morning from the Financial Times. Today is Monday, June 5th, and this is your FT News Briefing.

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Apple’s got a new gadget. Turkey’s got a new finance minister. And we’ll dive into one of the UK’s biggest leverage buyouts.

Kaye Wiggins
How do you buy a £7bn company when you’ve only got £100mn? You know, it’s really, really remarkable.

Marc Filippino
But first, a raucous Opec meeting ended with a production cut. I’m Marc Filippino and here’s the news you need to start your day.

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Saudi Arabia says it’s reducing oil production by a million barrels a day to try and prop up falling oil prices. This came after a tense Opec+ meeting in Vienna yesterday. African nations, including Nigeria and Angola, did not want to cut production. The Saudi move came after a deal in which African producers will have their quotas reduced starting next year.

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Turkey has a new finance minister. Mehmet Şimşek was sworn in over the weekend and he’s pledged to return to policies that are, quote, “rational”. Turkey has become known for unorthodox policies like cutting interest rates to rein in inflation. Here’s the FT’s Adam Samson on why Turkey’s recently re-elected president, Recep Tayyip Erdoğan, may have tapped Şimşek.

Adam Samson
I think it shows that Erdoğan is more concerned, maybe than have been in the past about the state of Turkey’s economy. Even though Erdoğan won the election, it went to a run-off. And one of the main reasons for that was because the president’s support has been severely eroded by the economic situation. So I think it signalled that Erdoğan knows he needs to make some change to policy here and that he knows something’s wrong.

Marc Filippino
Adam, how much could this be an olive branch to foreign investors?

Adam Samson
Well, I think that that’s really an excellent question. I mean, basically the background is foreign investors have fled Turkey over recent years because they really don’t like these unconventional policies at all. So foreign holdings of local currency bonds are near record lows, ditto for stocks. So I think putting somebody like Şimşek in is probably gonna be seen as a real positive and something of an olive branch. A lot of investors say it’s gonna take time to feel comfortable to come back, that it’s not just gonna be an instant thing, that the money’s gonna start flowing in. But I think certainly it’s gonna be seen as a move in the right direction.

Marc Filippino
Adam Samson is the FT’s Turkey correspondent.

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For the past several years, the FT has covered the financing behind one of the UK’s biggest buyouts, the takeover of Britain’s supermarket chain Asda. Behind the deal are two billionaires, Mohsin and Zuber Issa. They’re a rags-to-riches story — two working-class brothers who turned one gas station into a global empire. Their rise and their Asda deal is also a story of an economic era that’s coming to an end.

Kaye Wiggins
That was just so freely available and so cheaply available that they were able to go around borrowing money and using the borrowed money to buy all these petrol stations.

Marc Filippino
The FT’s Kaye Wiggins covered the rise of the Issa brothers and how they used their gas station empire as a launch pad to buy one of the UK’s biggest brands, the supermarket chain Asda.

News clip
See Asda are always working hard so we can get a little more and pay a little less . . . (Inaudible) Why pay more?

Zuber Issa
We are very pleased to announce that together with our partners TDR Capital, we are acquiring a majority stake in the iconic British supermarket chain, Asda. We believe . . . 

Marc Filippino
That’s Zuber in a PR video made by their gas station company EG Group. The announcement was a huge deal and at the time, Kaye was the FT’s private capital correspondent. She and our colleague Rob Smith were hooked by how the Issa brothers financed the deal.

Kaye Wiggins
I talked to a lot of people in private equity about this story because I’m just so fascinated by it. And I think it’s kind of like a mix of admiration and shock. (Laughter) Maybe they just look at it and they say, Oh my goodness, we would never try and do something this aggressive ourselves.

Marc Filippino
A big part of this story is TDR, a private equity firm that the Issa brothers have partnered with for years. Zuber actually mentioned TDR in the company announcement you just heard.

Kaye Wiggins
I think a lot of the stuff around the financing comes from TDR. I think what the brothers are all about is growth. They’re willing to take risks and that aligns, you know, very well with the TDR model of how they do financing, which is we can just borrow more and more and more.

Marc Filippino
That’s what private equity firms do. They borrow to buy companies hoping to turn them around and resell them for a profit. The deals are often called leveraged buyouts because the borrowed money, the debt, is used to leverage the smaller amount of cash the private equity firms put into the deal.

Kaye Wiggins
At the time, in 2021, we did this extensive story on all of the layers of leverage that they were using and they were selling off some of Asda’s assets. And Asda was taking on debt and there was, you know, extraordinarily little cash of their own they were putting in at that point. We reported that they’d only had to put in £780mn of their own money.

Marc Filippino
This year, Kaye and Rob discovered new details.

Kaye Wiggins
And the crucial thing that we’ve learned now is that of that 780mn, actually 580mn was from this related party loan from their own company.

Marc Filippino
Which means the brothers and TDR put even less cash into the deal — only £100mn each of their own money for a nearly £7bn company. And as part of the financing, Asda ended up with more debt.

Kaye Wiggins
It’s very common when a private equity firm decides to buy a company, the company itself will issue debt and that will be used to fund the transaction. But what’s not standard is this intercompany loan, this loan from their, like, sister company.

Marc Filippino
So now not only does Asda have more debt, EG Group is also saddled with a huge debt burden, which wouldn’t have been that much of a problem if interest rates hadn’t gone up. When interest rates were super low, as they had been for the past 15 years or so, it was cheap to borrow and refinance. But now, rates have risen to tackle inflation and when TDR and the Issas have to refinance their debt, it’s gonna be a lot more expensive.

Kaye Wiggins
So this is where the next complicated piece of financial engineering could happen, which is, there was a lot of talk about the idea that Asda might buy EG Group’s UK operations. And so you might look at this and think, well, hang on, like, the same people already own both of these companies. Like, how does selling it to themselves make any difference to anything? So you might think, why does that make any difference? But the answer is basically by doing that it would mean Asda would take on more debt in order to buy these petrol stations from EG Group, which would allow EG Group to reduce its debt.

Marc Filippino
And that’s exactly what happened. A few weeks after we spoke to Kaye, Asda announced it would buy the UK and Ireland operations of EG Group — hundreds of gas stations and a thousand convenience stores. The price tag, £2.3bn. So we called Kaye back up.

Kaye Wiggins
So we knew this was in train, as you know. But actually when I read some of the details, there were some details in there that surprised me.

Marc Filippino
Yeah, so tell me more about that. What surprised you, Kaye?

Kaye Wiggins
The detail that surprised me was how it’s finding that money, where it’s finding that £2.3bn, which is that . . . so it’s doing it partly by borrowing £770mn from Apollo, which is a big, well-known US private equity group. And so Asda is gonna have to pay interest on that loan, 6.75 percentage points over a benchmark. So in practice, that means, like, at today’s rates, that’s more than 11 per cent. So that’s huge cost for a supermarket, which is, you know, an industry where margins are thin at the best of times. So, you know, if we thought we had seen all of the financial engineering we were gonna see from these guys, we hadn’t.

Marc Filippino
So Kaye, as much as we can try to get into the heads of the Issas and TDR, what’s the goal of this financial engineering?

Kaye Wiggins
For now, it’s really all about EG Group’s debt, right? So EG Group has this urgent need to bring in some money from somewhere to repay some of that debt. The question I have about that basically is: would Asda have chosen this particular moment to buy those petrol station sites and take on that extra debt right now, if it wasn’t for the fact that EG had this debt burden and this urgent need to bring in money? My suspicion is the answer is no, that they wouldn’t have decided purely on the grounds of sort of strategic reasons. But we should say that they would argue there is a kind of commercial rationale for this, which is that now that Asda, when Asda owns the petrol station sites, it can more easily put Asda-branded stores on those sites. And hopefully the plan is that that will start generating extra money.

Marc Filippino
And we should mention that Asda has also said that its total debt will stay constant despite the cost of the deal. But Kaye, I want to remind listeners that when Asda and TDR set their sights on Asda, no one imagined that rates would go up this much. And now they have to perform this kind of juggling act. But they’re doing it with the fate of one of the UK’s biggest businesses.

Kaye Wiggins
And I mean, I guess that is kind of what’s at stake here, right? I mean, what is at stake here is the future of Asda. And so, a business that a lot of people depend on for their jobs and a lot of people depend on for their weekly foods, their weekly grocery shopping, has a big role in a lot of communities, like, you know, it really does matter what happens to Asda. This is a huge business in Britain and it’s kind of national brand. The fact that it is taking on all of this really quite expensive additional debt, just as rates are rising and the business is getting tricky, like, that matters. That matters a lot, there’s a lot at stake here.

Marc Filippino
Kaye Wiggins was the FT’s private capital correspondent when she reported the story. She is now the FT’s Asia financial correspondent based in Hong Kong. Thanks, Kaye.

Kaye Wiggins
Thanks.

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Marc Filippino
You can read more on all of these stories at FT.com. This has been your daily FT News Briefing. Make sure you check back tomorrow for the latest business news.

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