The UK’s competition regulator has provisionally cleared the owners of the petrol station company EG Group to buy Asda, the UK’s third-largest supermarket chain, if they address concerns about a possible loss of competition in 36 local areas.
The move could pave the way for the private equity firm TDR Capital, and the billionaire brothers, Mohsin and Zuber Issa, to start taking control of the retailer, which they acquired in February and jointly own.
They had been prevented from taking management decisions until the Competition and Markets Authority had completed its deliberations.
“We’re concerned the merger could lead to higher prices for motorists in certain parts of the UK,” said Joel Bamford, senior director of mergers at the CMA.
“However, if the companies can provide a clear-cut solution to address our concerns, we won’t carry out an in-depth phase 2 investigation,” Bamford added. The CMA asked for legally binding proposals to address its concerns.
The brothers and TDR said in a statement that they would work “constructively” with the CMA to “arrive at a satisfactory outcome for all parties.”
Asda’s petrol stations will be sold to EG, a highly-leveraged group that will take on about $1bn in extra debt for the purchase, in a deal that is a key part of the complex financing package that underpins the acquisition of the grocery chain.
EG Group, which was built up over two decades by the Blackburn-based brothers, grew rapidly with debt-funded acquisitions after an investment from TDR in 2014 and has 395 filling stations in the UK. The company has five working days to offer remedies to address the competition concerns.
It is likely to offer to sell forecourts in the affected areas rather than face the prospect of a phase 2 investigation that could last several months and delay any restructuring of Asda.
Since most of the local issues are likely to be resolved with the sale of individual petrol stations, Asda’s new owners could satisfy the CMA by selling fewer than 10 per cent of EG Group’s UK sites, said Andrew Taylor, co-founder of the consultancy Aldwych Partners and a former senior director at the Competition Commission, the precursor to the CMA.
The CMA found that on a national level the Issas would have little incentive to rein in Asda’s use of competitive fuel pricing and promotions to drive footfall in its supermarkets.
The decision “feels generous” to TDR and the brothers, Taylor said. “It could be that they do adopt a different pricing strategy to Asda” once EG has bought the sites, he said.
Although the Issas do not yet have management control over Asda, the company has announced a series of initiatives aimed at sharpening its focus on value and cutting operating costs.
It plans to cease in-store baking, re-jig store management roles and close two “dark stores” used for ecommerce fulfilment in London. It will also reduce its ranges, so it can sell higher volumes of a smaller number of products.
Asda will also introduce more concessions to its supermarkets after initial trials with DIY chain B&Q and toy retailer, The Entertainer, although it has denied it plans to sell clothing label George.
It is expected to reduce the currently high proportion of freehold stores and distribution centres via sale and leaseback deals, releasing capital to reduce the debt taken on to finance its acquisition.
The Issas need to find a replacement for Asda chief executive Roger Burnley, who has indicated that he will step down. Last week the supermarket group promoted John Fallon, its deputy chief finance officer, to finance director. He will replace Rob McWilliam, who plans to leave when his fixed-term contract ends later this year.