ASDA Price...Pocket the Difference!?

 

A cat was thrown amongst the pigeons, within the supermarket industry, when Aldi and Lidl came onto the scene. With their ability to offer cheaper ‘own brand’ products, consumers have latched onto these companies in recent tougher times when looking to save money. The renowned ‘big 4’ supermarkets have had to react to Aldi and Lidl’s growth in market share by taking matters into their own hands (Butler & Bowers, 2013). 

From 2014 to 2019, ASDA’s market share fell from 17.2% to 14.9% (Dyer, 2019), meaning that they are losing a grip on the market and, more importantly, competitors are growing! ASDA did, in fact, attempt a merger with Sainsbury’s but this was blocked by the regulator in 2019 as they felt the company would have gained too much control on the market. This potentially could have resulted in market manipulation and driven out competitors. This potential merger would have given them over 30% of the market share but this was frowned upon by the regulator as it was rumoured that, over time, prices would rise having a negative impact on the average shopper’s bill.

 Although ASDA and Sainsbury’s promised to give up 150 shops and offered £1bn in price cuts to the customer (McCormick, 2019), I strongly agreed with the Competition & Markets Authority (CMA) to block this merger as It would have potentially had a catastrophic impact on other supermarkets in the industry.

 Following the disappointment of the merger breaking down ASDA could have feared the worst but, however, they have recently been acquired by the Issa Brothers who own the Euro Garages (EG) group. EG are a retailer from Blackburn who operate petrol station and fast-food outlets mainly in the UK but also in Europe, the USA and Australia. The two entrepreneurs who own EG have funded this £6.8bn acquisition largely by debt (Smith & Wiggins, 2020). TDR Capital have backed the EG group and provided private equity to the brothers to aid their acquisition of the supermarket branch back off the US giant, Walmart. £4bn of the acquisition is going to be sourced by a debt package from Barclays (Wiggins, Massoudi, & Smith, 2020), consisting of a combination of high yield bonds and leveraged loans. Private equity is a source of capital used by investors, meaning the company was not placed on public listing for normal shareholders to be involved in. Is it really a wise move to use such large amounts of debt in an acquisition deal?

                                       Source: The Telegraph

As we speak the CMA are currently reviewing EG’s acquisition, as they believe that the petrol forecourt market will be affected as EG will also control ASDA’s further 320 petrol stations in the UK to add to their current 341 (Reuters, 2020). This could lead to a substantial lessening of competition in this market and stage 1 of the review is set to be concluded in February 2021. Currently Tesco leads the way in hyper-market owned petrol stations (with 509) but obviously, if this acquisition is to be given the green light, ASDA will become the market leader and would become the leader in this fiercely contested market.

ASDA and the Issa brothers are clearly keen to get the supermarket branch back on UK soil but as we look further into this acquisition, we must delve into the hidden secrecies of the deal particularly regarding tax. EG have set up a similar forecourt company in Jersey which is a limited company so only has a limited information publicly available (Oliver, 2020). Although this questions the ethical position of the business, it has allowed EG to face less scrutiny as onlookers into the business cannot publicly view all transactions made by EG. As a result of being set up in Jersey, this would also allow the owners to avoid a 0.5% stamp duty tax on the acquisition and shares. Another advantage for ASDA, by regaining control from the US, is to avoid that nation’s stringent corporate tax rate on profits. These activities will be investigated very closely by the CMA, as the UK has recently introduced limits to tax benefits for highly leveraged businesses and the Issa brothers are effectively trying to counteract to this by housing parts of the business in Jersey.

Reference List 

Butler, S., & Bowers, S. (2013, November 19). Britain's big supermarkets lose ground to cut-price rivals and upmarket grocers . Retrieved from The Guardian : https://www.theguardian.com/business/2013/nov/19/britain-supermarkets-market-share-fall-tesco-sainsburys-lidl

Dyer, R. (2019, June 25). Tesco, Sainsbury's, Asda and Morrisons lose more market share to Aldi and Lidl . Retrieved from ProactiveInvestors: https://www.proactiveinvestors.co.uk/companies/news/222754/tesco-sainsbury-s-asda-and-morrisons-lose-more-market-share-to-aldi-and-lidl-222754.html

McCormick, M. (2019, March 19 ). Sainsbury’s and Asda promise £1bn in price cuts after merger . Retrieved from Financial Times: https://www.ft.com/content/b375c890-4a2f-11e9-bbc9-6917dce3dc62

Oliver, M. (2020, October 12). Anger as newly-honoured billionaire brothers who bought Asda for £7bn head for Jersey tax haven . Retrieved from This is Money: https://www.thisismoney.co.uk/money/markets/article-8832105/Anger-billionaire-Asda-brothers-head-Jersey-tax-haven.html

Reuters . (2020, September 18). Asda enters convenience market with EG trial . Retrieved from Reuters: https://www.reuters.com/article/uk-asda-convenience-idUKKBN2692KZ

Smith, R., & Wiggins, K. (2020, November 13). EG Group’s owners cash out ahead of £6.8bn Asda deal . Retrieved from Financial Times: https://www.ft.com/content/fc184e76-df16-4827-b857-6b0b8e074a37

Wiggins, K., Massoudi, A., & Smith, R. (2020, October 23). Buying Asda: how petrol station billionaires plan to pull off the deal . Retrieved from Financial Times: https://www.ft.com/content/2a978525-d0cc-4a14-ba83-63732ee14067