Asda turns into cash cow for private equity buyer TDR Capital as its investment in the supermarket has already ballooned almost 20-fold
- TDR Capital has valued its stake in Asda at about €1.7bn (£1.4bn)
- The private equity said this is almost 20 times the amount it paid just a year go
- The Issa brothers and TDR put in less than £800mn of equity for the £6.8bn deal
Asda has already turned into a cash cow on paper for the private equity firm that bought the supermarket with the Blackburn-based Issa brothers only a year ago.
London-based TDR Capital has valued its stake in the grocer at about £1.4billion (€1.7billion) 19.8 times the amount it put in, according to documents seen by the Financial Times.
It said the it had marked its stake at 19.8 times its initial investment and while investor sentiment on supermarkets has imropved since the deal, much of the return has been delivered by leveraged financial engineering.
The massive expected return on investment was revealed in a fund marketing document and is based on the fact that TDR and brothers Mohsin and Zuber Issa mainly used borrowed money to pay for Asda.
Massive returns: TDR Capital’s investment in Asda has risen almost 20-fold in just a year
The Issa brothers and TDR put in less than £800million of equity combined for the £6.8billion deal completed in February 2021, with the rest funded by adding debt on to the supermarket chain, according to the report.
TDR put in €334million, but the document suggests even most of this investment was not from its own funds – it came from EG Group, the petrol station business also owned by the private equity firm with the Issa brothers.
It implies that TDR may have put in just tens of millions of euros of its own money to pay for Asda, according to the FT.
TDR also expects to see its €234million investment in forecourt owner EG Group grow by more than 10 times – it has already risen five-fold since the investment was first made in 2014.
Meanwhile, the private equity firm and the Issa brothers have continued to pile on debt on Asda.
Although they had planned to finance part of the deal by selling Asda’s 323 petrol stations to EG, the deal was called off in October last year.
To get round the problem, they put another £500million of debt on to the supermarket and used £250million of their own cash reserves.
A raft of UK businesses have been scooped up by private equity firms over the past couple of years as their cut-price valuations turned them into easy targets.
But private equity companies are criticised for often loading healthy companies with debt and squeezing them for more profit.
Rival supermarket Morrisons was taken over by US private equity house Clayton, Dubilier & Rice in October for £7billion.
The deal saddled it with £5.6billion of debt, which it will have to service, leading to fears it will be unable to keep prices low.
Last week, the supermarket was slapped with a ‘speculative’ debt rating by Fitch, which indicates ‘an elevated vulnerability to default risk’.
The agency warned Morrisons’ rating would be even lower were it not for the grocer’s strong management team and profitability.