Yahoo Finance Asda billionaires’ debt-fuelled empire puts pressure on prices
Mohsin Issa had little patience for the recent criticism levelled at Asda and its competitors as he confirmed plans for Britain’s third-biggest supermarket to acquire 350 petrol stations across the UK and Ireland.
Supermarkets have been accused of profiting from soaring food inflation in a supposed scandal dubbed “greedflation” and feathering their nests with unwarranted fuel prices.
Nothing could be further from the truth, Issa claimed.
“The DNA of this business is about value,” the media-shy Asda chief executive said. “And we are not here to rip that out of the DNA.”
The supermarket has spent millions over the years to ensure that “Asda price” means good value. Yet some in the City fear that the phrase may not be short-hand for a bargain for much longer.
Asda is lumbering under the weight of a £6bn debt pile and the supermarket’s £2.3bn petrol station deal with EG Group – another business owned by Moshin Issa and his brother Zuber – has seen the supermarket loaded up with yet more debt.
Observers say it may force Asda to raise prices higher than it would like.
And while the Issa brothers were keen to paint the deal as about growth for Asda, it also helped get debts down at EG as interest rates rise. It highlights the precarious position of the Issas’ debt fuelled empire.
Asda was already under scrutiny over an unwieldy debt pile, which was built up through the Issas’ £6.8bn buyout of the supermarket in 2021.
The EG deal will see the Blackburn billionaires load up Asda with £770m of high interest loans from private equity house Apollo, alongside a £450m equity injection by Asda’s owners – the Issas, private equity backers TDR Capital and US retail giant Walmart. The Apollo loans are thought to have a 2029 maturity.
Lord Rose, the retail industry veteran that chairs Asda’s board, sought to play down the impact of more borrowing on the already heavily indebted business.
“The business will grow. Debt over time comes down. And we believe this is a fully sustainable financial position to be in the capital structure,” the former Marks & Spencer and Ocado chairman said.
Some saw the deal as a positive move. The price of Asda’s corporate bonds edged up slightly, having rallied in recent weeks, in a sign that debt investors thought the acquisition would prove beneficial to the supermarket’s finances.
However, not everyone was convinced. Asda’s promise of low prices is likely to come under pressure as the Bank of England puts up interest rates in its battle with soaring inflation.
“[The debt is] a big number when interest rates are 4.5pc and likely to go higher,” said Clive Black, head of consumer research at Shore Capital.
He added in a note to clients: “The financial backdrop for Asda/EG worldwide has dramatically changed for the worse and so we shall watch with interest to see if Asda needs to de-leverage [pay down loans] further.”
The cost of a typical shopping basket of 45 items has risen by more than 20pc to £89.91 between June 2022 and April, according to Which?.
However, the supermarket has been battling to get prices down to fend off competition from German discounters Aldi and Lidl. The cost of a typical basket is lower today than its peak in January when it was £95.32.
The next pinch point for the business is likely to come in February 2026, when £3.6bn of loans are due for repayment. Asda will more than likely want to reduce its debts or restructure its finances before then.
Acquiring 350 of EG’s petrol stations is expected to help.
The merger is forecast to add £195m of earnings to the enlarged Asda group each year, which could be put towards reducing debts. It should also unlock £100m of cost-savings over the next three years.
Lord Rose cited the Apollo loan as evidence that Asda would have no trouble in refinancing the debts.
Raising money from private investors has “not been an issue”, he said, despite the ongoing debt market malaise caused by rising interest rates and fears of global recession.
However, the decision to tap private – rather than public – debt markets was telling to some observers.
“It’s not your first port of call,” said one investment banker. “Normally you will go for a private solution if a public solution is not available at attractive terms.”
This does not necessarily mean Asda will struggle to refinance its £3.6bn of debt. However, it may have to pay through the nose.
If the interest rates charged are on a par with the Apollo loan, Asda could find itself paying a double-digit percentage, one banker pointed out.
The Issas, TDR, and Walmart, if it is still involved, will also have to contend with a flood of other companies seeking to refinance corporate debt.
A report by one leading investment bank suggests that debt maturities in Britain will peak in 2026 with around £80bn due to be either refinanced or repaid.
The sterling high yield bond market is small compared with the US, which means a surge in refinancing is bound to drive up rates.
The risk is that Asda’s owners are left with an invidious choice: forgo profits, or increase prices on the shelves and forecourts to maintain margins.
However, some believe there is a more optimistic path open to the company. The implications of the supermarket’s EG Group deal “depends on the lenses you want to look through”, says another banker.
While the transaction has added debt, it has also handed Asda 1,000 “food on the go” outlets alongside 350 petrol stations.
Asda is behind its rivals in the convenience sector. The deal will almost overnight allow the Issas to turbocharge the rollout of its “Asda On the Move” brand at petrol stations across the country.
The supermarket has been battling to reverse a decade-long decline in market share. It is hoped that the convenience store rollout could mark a turning point.
Still, the billions in borrowing make it a high-risk gamble.
Markets anticipate that Asda is significantly more likely to default on its debts than listed rivals Tesco and Sainsbury’s.
Five-year credit default swaps (CDS) – which protect the buyer against the risk of default – are trading at more than 700 basis points, according to Bloomberg. This means the cost of insuring £100 of Asda debt is currently around £7-a-year.
By comparison, Tesco five-year CDSs are priced under 100 basis points, equivalent to less than £1 for every £100 of the supermarket’s debt sought protection on.
Lord Rose remains confident: “When you look at any business deal like this, you would look at whether this is sustainable for the medium, short-medium and long term.
“The overall leverage and our ability to service debt... with a business that is in a highly cash generative means that we have structured it appropriately.”
Time will tell. If he is wrong, Asda will be paying the price.
