When all else fails, big public groups sell troublesome subsidiaries to debt-fuelled private acquirers. walmart of the us has picked mohsin and zuber issa as preferred bidders for asda, its uk supermarkets group. the brothers, low-profile petrol station owners from blackburn, lancashire, could end up leading a 6.5bn takeover of one of uks most familiar retail brands. should shoppers, workers or investors be worried?
The finances of the main business of the issas, eg group, do not inspire huge confidence. eg has expanded fast, purchasing thousands of petrol stations worldwide. it has a lot of net debt about 8bn in 2019, when the group made a 82m pre-tax loss. its borrowings are rated highly speculative by s&p.
However, eg is not bidding for asda. the issas are the bidders, with long-term private-equity backer tdr. walmart would keep a minority stake in asda and an interest in ensuring it was tolerably run by the issas, who know convenience stores better than supermarkets.
Asda should change hands free of pension liabilities, thanks to an insurance buyout. suppose it bears no previous debt, walmart keeps a 40 per cent stake and tdr buys 30 per cent. the issas might then have to find 1bn each. their shares in eg could feature as collateral. at pre-coronavirus earnings estimates, they would be buying at just five times ebitda.
The deal might then raise fewer red flags. the main loser remains walmart. it hoped to take uk grocering by storm. it ended up with storm-damaged goods instead. after adjusting for inflation, this weeks mooted valuation for asda is 5bn less than walmart paid in 1999. nor would a deal with the issas produce savings to rival the sale to j sainsbury blocked by regulators or proceeds from an initial public offering.
We do not know very much about the issa brothers. but they plainly have something in common with fellow private tycoons jim ratcliffe and ranjit boparan: a nose for a seller running out of options.
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