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When Walmart bought Asda for almost £7bn in 1999, the Issa brothers, then in their late twenties, were working in their parents’ petrol station on the outskirts of Manchester.
Now the low profile entrepreneurs from Blackburn, who built a small family business into an empire with almost 6,000 forecourts in 10 countries, 44,000 staff and €20bn annual revenues, are attempting to take control of the UK supermarket chain.
The Issas, backed by private equity firm TDR, have been selected as the preferred bidders in the £6.5bn sale of Asda, fending off competition from private equity group Apollo. The deal is expected to be confirmed as soon as this week, according to people briefed on the process.
The brothers have been on the prowl for an acquisition since EG missed out on the $17bn sale of Speedway, the US petrol station group, last summer. Long running talks for the acquisition of Australian forecourt operator Caltex continue, although Caltex rejected EG’s A$3.9bn offer in March.
TDR, which owns 50 per cent of EG Group, and the brothers are bidding for Asda through a new vehicle, according to one person briefed on the matter. TDR will provide some money and debt; Walmart will retain a minority stake.
Not everyone is convinced that the brothers have sufficient free cash to fund an equity commitment that, depending on the structure of the deal, could amount to £1bn. “My fear is that they will secure the funds by pledging some of their equity in EG,” said one debt analyst who follows the company. “That changes the risk profile of EG debt.”
Through a series of previous acquisitions EG, which is valued at around £10bn, has amassed debt of €8bn, secured against its large property portfolio.
The brothers are convinced that Asda will complement their petrol station business. EG recently struck a deal for the supermarket chain to open three trial outlets on its forecourts. This pilot could expand as Asda develops a convenience business that earns higher margins than big stores. EG could also tap into Asda’s home delivery service.
Mohsin Issa, 49, and his sibling, Zuber, 48, believe their shop floor experience could re-energise Asda’s bigger stores.
“We grew [EG] from nothing,” said Zuber in an interview with the Financial Times before EG’s interest in Asda was disclosed. “We’ve been on the pumps, we’ve been stocking the shelves, cleaning the toilets. You do everything. And once you do the foundation work, it’s no different wherever you go in the world. It’s a petrol station; you’re selling fuel, you’re selling coffee, you’re selling convenience.”
When they started the business in 2001 their plan was to turn petrol station forecourts into places people chose to visit. They believed that by adding a branded coffee shop or fast food outlet, people would come even if they did not need petrol. Subway, the sandwich chain, and Spar were among the first companies they struck partnerships with.
The brothers started expanding in the UK under the Euro Garages brand just as oil majors, faced with declining fuel sales, started pulling out of the market, leaving lots of cheap sites available to buy. EG owns the forecourts and sells fuel from oil groups such as BP and Shell under their branding.
“We were creating a destination,” said Mohsin. “Motorway services, off the motorway.”
The group has a similar model in the US, where it entered in 2018 with the purchase of Kroger’s convenience portfolio.
But the debt analyst stressed there was a big difference between this simple, capital-light and repeatable business model and the complexity of a supermarket chain with more than 500 stores. “Even Walmart didn’t do great with Asda — that’s a big red flag”, he said.
Lawyers expect the UK’s Competition and Markets Authority to take a keen interest in the proposed transaction. When Sainsbury’s tried to buy Asda in 2018, the CMA concluded that while the combination would have little effect nationally, it could reduce competition in fuel retailing in 127 local areas.
EG has 396 filling stations in the UK, about 5 per cent of the market, and more than Sainsbury’s had, while Asda has roughly 320. Any required divestments would likely focus on individual filling stations where there is overlap between the two companies, rather than blocks of forecourts.
The pandemic has also brought challenges for EG. Moody’s rating agency downgraded the group’s outlook to negative, from stable, on March 3, warning of weak earnings, high leverage, high acquisition risk and a limited cushion for underperformance. In May, it said EG’s leverage would rise because of lower fuel volumes.
EG would not comment on current trading but its annual report, filed in September, showed that fuel sales dropped in March but recorded “a gradual recovery” since May.
With the pandemic triggering a reduction in commuting, which will hit fuel sales, the core business is expected to become tougher.
However, Zuber argued that people would still want to meet face to face and, if more offices were shut down, would increasingly use roadside cafés with good WiFi and coffee.
EG’s recent accounts showed that the group’s non-fuel businesses largely traded at or slightly above normal levels in most regions throughout the pandemic.
Mohsin said the company “makes more money selling a cup of coffee than we would do on an average tank fill-up”.
In the year to December 31 2019, EG’s revenue was €20bn, up from €12bn the year before. The group made a pre-tax loss of €82m, down from €160m a year earlier, although operating profit rose from €220m to €253m.
One person with knowledge of Asda said the relative youth and entrepreneurial zeal of the Issas may have appealed to the Walton family behind Walmart.
If the brothers do clinch a stake in Asda they will need every bit of that skill to succeed where Walmart’s own efforts stalled.
Additional reporting by Kaye Wiggins and Robert Smith in London
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