ALEX BRUMMER: Asda’s deal with EG is unlikely to put a misfiring enterprise back in the fast lane
Making head or tail of what the brothers Mohsin and Zuber Issa are up to at Asda may require a cold compress.
What is certain is what may be good for the owners and their private equity backers TDR Capital may not necessarily be as good for consumers.
That is in spite of chairman Stuart Rose’s insistence that the deal creates ‘a new retail champion in the UK’.
The combined group will own 600 supermarkets, 700 petrol forecourts and 100 convenience shops
Buying in the UK and Irish forecourts, currently in the hands of EG Group, for £2.3billion, is financial engineering designed to cut EG’s global debt of £7.2billion. It also has some industrial logic.
Petrol stations and convenience stores are the new battleground for grocers. The combined group will own 600 supermarkets, 700 petrol forecourts and 100 convenience shops.
The opportunity to add to the expanding network of Asda Express shops and the group’s food-to-go locations looks sensible. And former owner Walmart is closely involved, committing £450million of new equity to the transaction.
The world which the Issa family now faces is very different from when it did its top-of-the-market deal in October 2020. It was still the era of super low interest rates and borrowing cheaply was a no-brainer.
The surge in the cost of borrowing upturned the economics and constrained investment.
In the past, Asda was often a price setter among UK supermarkets. But it has been ceding market share and low pricing power to secretive German rivals Aldi and Lidl.
The deal comes at a time when grocers in Britain find themselves at the vortex of a row about surging food prices up 19 per cent over the last year. Even more concerning, dairy and egg prices are up a whopping 34 per cent.
Any number of excuses are out there for this experience, ranging from the vertical rise in the cost of energy and freight to fertilizers.
Petrol stations and convenience stores are the new battleground for grocers
My own suspicion is that if there has been greedflation, it is less the responsibility of the grocers and more the branded good suppliers such as Kraft Heinz and Coca-Cola who have absorbed little of the pain and maintained profit margins.
None of this is helpful to Asda’s owners. High supplier prices give them very little room to manoeuvre. Arguably, as part of Walmart, bargaining power was stronger.
There are also questions as to whether maxing out on petrol stations is really the way ahead.
In the UK, the goal is to end the sale of petrol vehicles by 2030. Many forecourts could be converted to EV charging stations and that may keep customers mooching around the shops for longer.
The capital cost would be formidable and the Issa brothers would find themselves up against the likes of Shell, with unlimited resources.
At some point, Asda’s private equity partners will be looking for an exit.
The rise of the Issa brothers is an inspirational story. The latest deal may calm the nerves of those holding EG and Asda debt. But it is unlikely to put a misfiring enterprise back in the fast lane.
The departure of Graeme Pitkethly as finance director of British branded goods leader Unilever was probably inevitable.
The choice of Dutch dairy chieftain Hein Schumacher to succeed Alan Jope as chief executive blocked upward progress for Pitkethly after eight years keeping the books.
I came to know Pitkethly during the battle first to see off Kraft Heinz and later when a revolt by UK shareholders forced the board to re-consider plans to move to the Netherlands.
In defence of its British listing, Pitkethly showed me a chart he has been keeping on the changing shape of the enterprise.
Over time Unilever’s hygiene and beauty products, with a heritage at Port Sunlight on the Wirral, were growing faster than the food categories and would become dominant. That in itself was reason to stick with Britain.
Pitkethly had a far better understanding of Unilever than over-rated activist Nelson Peltz who has been pulling the strings.
Silicon Valley Bank (SVB) surrendered any cachet it had among the tech elite when it went bust in March.
So it is no great surprise to read that the buyer of its UK arm is considering a name change to HSBC Innovation Bank. That has a better ring to it and hopefully demonstrates a seriousness of purpose in backing UK biotech, fintech and AI genius.