It once copied the Walmart playbook so well that Walmart came in and bought the company. But just like Walmart’s eventual back-track from the business, in recent times it has all gone south at Asda.
Indeed little seems to have gone right after the controversial and highly leveraged acquisition of U.K. supermarket chain Asda by the Blackburn, north west England-based Issa brothers, better known for their gas station and forecourt retail empire, along with private equity business TDR Capital.
The Issas (Zuber and Mohsin) have faced persistent questions ever since, after they put just $131 million of cash into the deal, as did TDR Capital, with the remainder funded with the largest sterling corporate bond sale on record, according to Bloomberg, as well as a loan from parent company of EG Group.
Asda is currently searching for a chief executive after a number of challenging years since its debt-propelled $8.9 billion deal to take over the retailer, with the GMB union imploring the owners to take “urgent action” and warning of signs that the supermarket is “in a fight for survival”.
Its latest results do little to dispel that view. Asda, in which Walmart retains a 10% stake, reported that sales had fallen 6.4% in the three months to August 10, as the supermarket chain became the only one of the U.K.’s so-called ‘big four’ – alongside Tesco, Sainsbury’s and Morrisons – to see a sales drop
That meant that the U.K.’s third-largest supermarket chain lost 1.3 percentage points of market share to 11.8%, putting it only just ahead of German discounter Aldi in fourth place and, like Morrisons before it, looking increasingly unlikely to hold that position for long.
Asda Ownership Changes
Zuber Issa is selling his 22.5% stake back to TDR while Mohsin will retain his stake but is expected to step back from the day-to-day running of the business when the deal completes in the Fall. As a result, TDR will increase its stake from 45% to 67.5%, while Mohsin keeps 22.5% and Walmart holds its 10% stake.
Asda and EG Group also feel increasingly entwined. After acquiring Asda with TDR, the brothers folded part of their forecourts business, EG Group, into the grocery chain last October, as Asda bought part of EG Group’s U.K. business for around $2.6 billion, giving it 356 sites, including convenience stores on gas station filling stations. The deal was funded by another billion dollars of loans, plus $588 million in new funds from the Issas and TDR. This June, EG Group sold its remaining U.K. petrol stations to Zuber for nearly $300 million.
Mohsin has even faced calls from Asda chairman and retail veteran Lord Stuart Rose to step back after the former boss of Marks & Spencer said that he was “embarrassed” by the chain’s performance as it hit its lowest market share in at least 13 years.
Nadine Houghton, national officer for the GMB Union, which represents thousands of Asda staff, has accused TDR Capital of financial mismanagement and said that it had “heaped debt on to this British institution and now the rot is creeping in”.
Asda responded that its market share loss came amid “an extensive period of transformation”, including opening neighborhood convenience stores and upgrading its IT infrastructure, with an additional $39 million store investment program during the second half of the year.
The company has also completed a refinancing of most of the group’s $5.1 billion debts which, according to Asda, will provide a robust capital structure for the next decade and “the flexibility to continue investing in the business and reduce leverage”.
The first step to recovery must surely be to reverse sales decline and perhaps Asda could do worse than to rewind the playbook and check out how Walmart does it.
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