Asda takeover marks biggest test for EG’s debt-fuelled dealmakers
Issas and TDR must win over investors for £6.8bn grocery deal after auditor resigned
After two brothers from Blackburn in northern England beat the Wall Street behemoth Apollo in the race to buy Asda this month, they were riding high.
Mohsin and Zuber Issa — who partnered with buyout group TDR Capital for the £6.8bn deal — were praised by chancellor Rishi Sunak for returning the Walmart-owned grocery chain to UK ownership and then named in the Queen’s Birthday Honours list.
But the public elation hid private turmoil. Last week, Deloitte abruptly resigned from auditing EG Group, the acquisitive and highly-leveraged petrol stations business run by the brothers and their backers, because of concerns over its governance and internal controls.
Now, the Issas and TDR, which an adviser called “one of the most secretive private equity firms I know,” must set out a plan to finance the most ambitious UK grocery deal in decades just as an unflattering spotlight is cast on the company that has fuelled their meteoric rise.
“The question is, have they bitten off more than they can chew?” a senior dealmaker who has followed EG said. “Is this ego over sense, and have they gone too far?”
The Asda purchase will be the UK’s largest leveraged buyout since KKR bought Boots in 2007, handing the buyers control of the UK’s third-largest supermarket, with its 145,000 staff and 14 per cent of the grocery market.
“[The brothers and TDR] have managed to do a good job of being under the radar,” one adviser said. “Going for Asda will bring them into the public eye more than they are used to, which is going to be quite challenging.”
Financing the deal
So far the buyers have not explained, publicly or even on a call with EG’s debt investors, how they plan to finance the supermarket bid, and bankers involved have said they are not able to share enough information about the deal's structure to drum up early interest from potential investors.
EG is not a party to the Asda takeover but its investors have questions about what such a large deal by the company's owners could mean for them. “[The] problem is we don’t get replies,” one EG investor said.
The Financial Times has talked to several insiders with direct knowledge of the deal to piece together how it has been assembled. Those conversations revealed a complex structure that involves offshore vehicles and financial engineering. The takeover has not completed so the financing plan is subject to change, the people warned.
One likely component is the sale of Asda’s petrol stations to EG, two people with knowledge of the matter said. EG’s owners have set up a vehicle called Bellis Forecourts and a separate vehicle called Bellis Property NewCo in Jersey, where only limited information is publicly available. Petrol station sales were not discussed on the investor call, the person said.
Because the companies are private, such a transaction would face less scrutiny than listed groups would under “related party transaction” rules, which seek to ensure assets are transferred at a fair price.
However, the UK’s Competition and Markets Authority, which cited reduced competition in fuel retailing among its concerns when it blocked J Sainsbury from buying Asda last year, may demand that EG dispose of some of its sites.
The largest component of the financing for the Asda deal will be a £4bn debt package led by Barclays, a combination of high-yield bonds and leveraged loans.
Bankers on the deal hope it will achieve a BB rating, below investment grade but still far from the lowest reaches of the junk bond market. It would leave Asda with leverage of about 3.5 times its £1.2bn earnings before interest, tax, depreciation and amortisation, according to a person familiar with the matter. EG Group has net debt of more than ten times its adjusted earnings.
Limit the cash
The Issas’ playbook on previous, smaller deals has been to fund the equity component of new acquisitions without putting their hands in their pockets, most recently by using preference shares.
Those, or “payment in kind” notes, which can pay interest with further debt rather than cash, would, if used, allow the brothers and TDR to further reduce their costs. That would potentially enable them to fund their equity stakes in a £6.8bn company with just a few hundred million pounds each. TDR’s most recent fund is worth €3.5bn and it is rare for private equity groups to commit more than 10 to 15 per cent of a fund to a single deal.
Walmart, the US-listed retailer that has owned Asda for 20 years, will continue to own a stake in the British grocer, but has declined to say what the size or structure will be. Three people with knowledge of the process said it was expected to be in the region of 25 per cent.
“As you would expect, all future plans for Asda were discussed in detail with Asda and Walmart during the sale process,” an EG spokesman said. “The capital structure that we will put in place for Asda will provide a strong platform to enable investment, accelerate the strategy and develop the business.”.
Governance issues
EG has grown rapidly from a single petrol station into a global group employing 44,000 people and generating €20bn of revenues, in line with some of the UK's largest listed companies. But its governance structure has not kept pace. The company’s board has no external members — it consists of the brothers and two TDR executives — which was a key concern for Deloitte according to one person briefed on the matter.
“Given their size you’d expect a good list of non-execs and a heavyweight chairman,” one person who has worked with the company said.
One EG bondholder said: “It seems crazy they don’t have multiple independent directors and I can’t see any reason why they haven’t put this in place.”
EG Group’s annual report, filed in September, said it was seeking non-executive directors and a chairman. Mohsin Issa told investors on the call last week that the group would put this structure in place in time for a planned stock market listing, without providing details on timing.
Asda will have a separate board, a spokesman for TDR and the brothers said.
The way the company will be set up is expected to bring tax advantages. Two people involved said the grocer would be owned by a vehicle based in Jersey — one of 12 TDR and the brothers set up for the deal, with help from Appleby, the law firm at the centre of the Paradise Papers leaks.
The Jersey structure would allow its owners to avoid a 0.5 per cent stamp duty charge when they sell the company, according to a senior tax lawyer not involved in the deal.
One EG debt investor said he expected Asda’s debts after the deal would eat into its statutory profits, also reducing its corporation tax bill, since this often happened with highly-leveraged businesses — though the UK has introduced limits to such tax benefits.
Against that backdrop, the investor questioned Mr Sunak’s support of the deal. “I'm not sure why the government is cheering this,” he said.
Boohoo’s biggest outside investor rejects call for leadership change
Jupiter tells MP it has ‘significantly escalated’ its engagement with fashion group’s board
Boohoo’s largest external shareholder has rejected a call for the fast-fashion retailer’s leadership to be removed in light of widespread labour abuse in its supply chain, but warned that “more needs to be done” to improve corporate governance.
Jupiter Fund Management wrote to Leicester MP Liz Kendall this week setting out its position, two weeks after she urged shareholders to “demand” new senior directors at Boohoo following “appalling failures” to address illegally low wages among its UK suppliers.
In the letter, seen by the Financial Times, Jupiter chair Nichola Pease said the group had “significantly escalated” its engagement with Boohoo’s board and management after allegations of poor conditions and pay at some of its Leicester suppliers resurfaced in July.
Boohoo, which has benefited from the Covid-19 pandemic as its short supply chains enabled it to make a rapid shift to selling lockdown-appropriate loungewear, had largely recovered from a knock to investor confidence, when the company scrambled to defend how its clothes are made.
But its share price took another dive this week after the Financial Times revealed that PwC, which has served as Boohoo’s auditor since it listed in 2014, had decided to stop working for the Aim-listed group.
The stock has lost a third of its value since the beginning of July, taking its market value to about £3.3bn.
Ms Kendall had argued that it “would make a mockery of any claims to support responsible investing if the same executives who allowed these appalling failures to take place, despite repeated warnings over many years, were kept in place by the shareholders”.
Boohoo’s largest shareholder is its co-founder and executive chairman Mahmud Kamani, with critics, including former chairman Peter Williams, arguing that the public fashion group is still run as a family firm.
Jupiter, which owns just under 10 per cent of Boohoo, rejected the call for new leadership, however. Ms Pease said she was reassured by recent measures, which include a promise to publish a list of suppliers and add two new board members to oversee sustainability work and Boohoo’s “change agenda”.
“[Jupiter] pushed them very hard to go down this particular route and in credit to the company, they haven’t pushed back,” said one person with knowledge of the two parties’ conversations.
Boohoo last month published an independent review into its supply chain by senior lawyer Alison Levitt, who found the company had not profited from the “widespread” underpayment of workers, but knew about it and did not act quickly enough.
The online retailer’s oversight of its supply chain had been “inadequate for many years” and its internal processes were “well below the standard which would be expected of a company of its size and status”, Ms Levitt noted.
Having had access to notes from board meetings, Ms Levitt also revealed that senior executives had raised concerns about the amount of influence exercised by Mr Kamani and his family on at least five occasions since 2014.
Ms Pease said Jupiter had pushed Boohoo to make the review public, arguing that transparency was key to rebuilding trust in the company, even though the review contained “disappointing aspects that are rightly critical of the company’s previous approach”.
>>> Up
* ABN AMRO GDRs Raised to Buy at Goldman; PT 11.40 euros
* BPER Banca Raised to Buy at Goldman; PT 2.20 euros
* Collector Raised to Buy at ABG; PT 15 kronor
* Gem Diamonds Raised to Buy at Citi
* Intesa Sanpaolo Raised to Buy at Oddo BHF; PT 2.25 euros
* Kainos Raised to Buy at Berenberg
* Mediaset Espana Raised to Buy at Intermoney Valores; PT 5 euros
* Mycronic Raised to Hold at Handelsbanken; PT 200 kronor
* Puma Raised to Buy at MainFirst; PT 95 euros
>>> Down
* Air France-KLM Cut to Sell at ABN Amro Bank; PT 2 euros
* Airtel Africa Cut to Underweight at Barclays; PT 60 pence
* Banco BPM Cut to Neutral at Goldman; PT 1.85 euros
* Hellenic Telecom Cut to Underweight at Barclays; PT 13 euros
* Huhtamaki Cut to Hold at Handelsbanken; PT 45 euros
* IAG Cut to Hold at Liberum; PT 100 pence
* JM Cut to Hold at Handelsbanken; PT 300 kronor
>>> Initiation
* Royal Unibrew Rated New Buy at Citi
>>> Call
* Evolution PT Hiked at Morgan Stanley Post 3Q, U.S. ‘Next Leg’
* Kering Shows Strong Rebound in 3Q, But Gucci Trailing: Bernstein
* L’Oreal Sales Show ‘Power’ of High-Quality Portfolio: Jefferies
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* Moncler 3Q Beat Lagging Best-in-Class Luxury Players: Bernstein
U.S. equity futures were steady with Treasury yields, while Asian stocks edged higher, as traders digested the final presidential debate and lawmakers in Washington continued to haggle over a spending bill.
S&P 500 contracts fluctuated while shares in Japan, China, South Korea and Hong Kong saw modest gains on subdued volumes. President Donald Trump and former Vice President Joe Biden debated topics including the response to Covid-19, immigration policy and health-care reform. The 10-year Treasury yield steadied around 0.85% amid data showing the labor market is still gradually recovering. The dollar was little changed. Intel Corp. tumbled in after-hours trading after a tepid forecast.
US After Hours INTC -9.6%, MANH -9.2%, STX -4.9% fall on earnings; SAM +9% up on earnings; GILD +5% as co confirms FDA approval of remdesivir
Nikkei +0.38% Hang Seng +0.51% CSI -0.35% Shanghai -0.27% Shenzen -1.09%
Eur$ 1.1801 CNH 6.6750 CNY 6.6851 JPY 107.70 GBP 1.3050 CHF 0.9076 RUB 76.5914 WTI$ 40.45- 0.49%
S&P -0.13% Nasdaq -0.07% EuroStoxx +0.12% FTSE +0.23% Dax +0.14% SMI+0.33%
Macro :
- German Pandemic Recovery Could Take a Decade, DIW Head Tells SZ
- EU May Impose Tariffs on Aluminum Converter Foil From China
Keep an eye on :
- ABBN SW : ABB 3Q Operating Ebita Beats Estimates
- AC FP : Accord Posts 3Q Sales of EU329m, Down 63.7% Like-For-Like
- AIR FP : Airbus manufacturer aims to lift output of A320neo single-aisle aircraft from second half of next year - FT
- AI FP : Air Liquide 3Q Comparable Sales Growth -0.9%
- ATL IM : TCI Says No Intention of Acquiring Control of Atlantia: Filing
- BAYN GY : Bayer's Request for Roundup Appeal Rejected by California Court
- BETSB SS : Betsson 3Q Operating Profit SEK329.1M
- BOO LN : Boohoo’s Largest Outside Investor Opposes Leadership Change: FT
- BVI FP : Bureau Veritas 3Q Rev. EU1.15b, Est. EU1.12b
- CEC GY : Ceconomy FY Sales Meet Estimates, Sales Momentum Continues In 1Q
- DAI GY : Daimler Sees Ebit for FY 2020 at Prior-Year Level, Raises Earnings Forecast on China Auto Sales Rebound
- ECONB BB : Econocom Cuts FY Organic Revenue Forecast
- ELIS FP : Elis Raises FY Ebitda Margin, Free Cash Flow Targets
- EPIA SS : Epiroc 3Q Orders Beats Estimates
- EQNR NO : Equinor Appoints Skeie as CFO From Nov. 1 as Bacher Resigns
- EO FP : Faurecia 3Q Rev. Ex-Fx Falls by 7%; Raises 2H Guidance
- ICA SS : ICA Gruppen 3Q Adjusted Operating Profit Beats Estimates
- IPS FP : Ipsos 3Q Revenue EU468.6M
- INTRUM SS : Intrum 3Q ‘Strong,’ Pandemic Impacts New Business Volumes, Launches Share Buybacks to Secure Incentive Program
- ILD FP : Iliad to Sell 60% of Play Infrastructure to Cellnex for EU804m
- ITM LN : The Race to Hydrogen Goes Beyond Brexit With Italy-U.K. Deal
- KER FP : Gucci’s Appeal Holds Up in Pandemic as Kering Beats Estimates
- LI FP : Klepierre Nine-Month Gross Rental Income EU867.8m, -7.3%
- KWS GY : KWS Saat FY Net Sales Beat Estimates
- KOMN SW : Komax Sees FY Revenue At Least CHF300M, Est. CHF316.0M
- MC FP : LVMH to Pay Interim Div. of EU2/Shr
- MC FP : PE veteran behind LVMH arm launches own US$500m Asia fund
- ML FP : Michelin Raises FY Guidance; Boosts Credit Line to EU2.5b
- MONC IM : Moncler 9M Revenue EU765.1M
- NEOEN FP : Neoen Wins 14MW of Wind, Solar Projects in France
- NDA SS : Nordea Beats Profit Estimates and Pledges to Reinstate Dividend
- NHY NO : Norsk Hydro 3Q Revenue Beats Estimates
- ORA FP : Orange Considers IPO of Cyberdefense, CEO Says: Les Echos
- OBEL BB : Orange Belgium Maintains FY Adj Ebitda EU310M to EU330M
- OR FP : L’Oreal CEO Expects to Outperform Market in 2020, L’Oreal CEO Confirms To Get Out Of Around 1,000 U.S. Stores
- PYPL US : PayPal Said to Be in Talks to Buy Crypto Firms Including BitGo
- PNDXB SS : Pandox 3Q Income From Property Management SEK630.0M
- RNO FP : Renault Beats Revenue Estimates as Electric-Car Sales Surge
- RNO FP : Renault Deputy CEO Says Europe Virus Surge Has Hurt Visibility
- RIEN SW : Rieter 9M Orders CHF425.1M
- SSABA SS : SSAB Said to Eye Tata Steel Europe Deal as Thyssenkrupp Backup
- SCHP SW : Schindler Boosts FY Net Income Forecast, Misses Estimates
- LIGHT NA : Signify 3Q Adjusted Ebita Beats Estimates
- SNB SW : SNB May Have to Sell Some of Its $100 Billion in U.S. Stocks
- THULE SS : Thule 3Q Adjusted Ebit Beats Estimates
- TKA GY : SSAB Said to Eye Tata Steel Europe Deal as Thyssenkrupp Backup
- WHA NA : Wereldhave Boosts FY EPS Forecast
- WIHL SS : Wihlborgs 9M Income From Property Management SEK1.41B
- WDI GY : German Financial Watchdog Sees Rising Credit Defaults: SZ
After Hours Summary: INTC -9.6%, MANH -9.2%, STX -4.9% fall on earnings; SAM +9% up on earnings; GILD +5% as co confirms FDA approval of remdesivirAfter Hours Gainers:
Companies trading higher in after hours in reaction to earnings/guidance: SAM +9%, FFBC +8.3%, MAT +6.1%, BOOM +5.4%, ABCB +3.7%, PBCT +3.7%, NXGN +3%, COF +2.7%, VICR +2.3%, WAL +1.9%, SIVB +1.4%, EIG +0.1%
Companies trading higher in after hours in reaction to news: AKBA +7.3% (presents results from INNO2VATE global Phase 3 program), GILD +5% (confirms FDA approval of remdesivir for the treatment of COVID-19), FUBO +4.8% (fuboTV rolls out updated Multiview feature on Apple TV), FTAI +4.6% (to collaborate with LMT on The Module Factory), HAS +2.9% (in sympathy with MAT earnings), CNX +1.2% (EQT may pursue takeover of CNX, according to Bloomberg), AUPH +1.1% (announces data from Aurinia's AURA-LV and AURORA pivotal trials), EQT +0.7% (EQT may pursue takeover of CNX, according to Bloomberg), AMD +0.7% (reacts to INTC earnings; INTC struggles good for AMD), TSLA +0.4% (plans to add a new 4D radar, according to Electrek), ZUO +0.2% (Hound Partners increases passive stake), MSFT +0.2% (Minecraft will now require a Microsoft account to play), WMT +0.2% (sues DOJ and DEA seeking clarity for pharmacists), LOGI +0.1% (stock offering), ATKR +0.1% (acquires assets of Queen City Plastics)
After Hours Losers:
Companies trading lower in after hours in reaction to earnings/guidance: CYBE -16.4%, LLNW -16%, USX -12%, EHTH -10.8%, INTC -9.6%, MANH -9.2%, STX -4.9% (also increases dividend and buyback authorization), BJRI -2.5%, OZK -2.4%, RHI -2.3%, VRSN -2.3%, CLGX -1.9%, ASR -0.5%, FFIN -0.4%, ASB -0.1%
Companies trading lower in after hours in reaction to news: MIST -15.9% (stock offering), SFNC -7.9% (resumes stock repurchase program), BDX -1.9% (names new CTO), WDC -1.5% (in sympathy with STX earnings), ASR -0.5% (reports Q3 results with traffic down 70.2%), SALT -0.2% (to sell Ultramax bulk carrier), HHC -0.1% (announces proposal for Lower Manhattan's Seaport area)