ALEX BRUMMER: Battle for UK forecourts

Making heads or tails of what brothers Mohsin and Zuber Issa are up to at Asda may require a cold compress.

What is certain is what can be good for the owners and their backers of private equity. TDR Capital does not necessarily have to be good for the consumer.

That’s despite chairman Stuart Rose insisting the deal creates ‘a new retail champion in the UK’.

Buying petrol stations in the UK and Ireland, currently owned by EG Group, for £2.3bn is financial engineering aimed at reducing EG’s £7.2bn global debt. There is also some industrial logic in it.

Gas stations and convenience stores are the new battlefield for grocers. The combined group will own 600 supermarkets, 700 gas stations and 100 convenience stores.

The opportunity to add to the group’s growing network of Asda Express stores and food-to-go locations seems sensible. And former owner Walmart is heavily involved, committing £450m of new equity to the transaction.

The world the Issa family faces now is very different from when she made her top deal in October 2020. It was still the era of super low interest rates and borrowing cheaply was a no-brainer.

The rise in the cost of borrowing caused an upheaval in the economy and limited investment.

In the past, Asda has often been a price setter among British supermarkets. But it has ceded market share and low pricing power to secretive German rivals Aldi and Lidl.

The deal comes at a time when grocers across Britain are in a vortex of argument over soaring food prices which have risen by 19 per cent over the past year. More worryingly, dairy and egg prices have risen as much as 34 percent.

There are all sorts of excuses for this experience, ranging from the vertical rise in the cost of energy and freight to fertilizer.

My own suspicion is that if there has been greed, it is less the responsibility of the grocers and more of the branded suppliers like Kraft Heinz and Coca-Cola who have taken little of the pain and kept the profit margins.

None of this is helpful to Asda’s owners. High supplier prices give them little room for maneuver. No doubt the bargaining position as part of Walmart was stronger.

There are also questions as to whether maximizing the use of gas stations is really the way forward.

In the UK, the target is to end the sale of petrol vehicles by 2030. Many gas stations could be converted into electric vehicle charging stations, potentially allowing customers to hang out longer in the stores.

The cost of capital would be formidable and the Issa brothers would take on the likes of Shell with unlimited resources.

At some point, Asda’s private equity partners will look for an exit.

The rise of the Issa brothers is an inspiring story. The latest deal may calm the nerves of those who have EG and Asda debt. But a failed venture is unlikely to get back on track.

Lost talents

The departure of Graeme Pitkethly as chief financial officer of British brand goods leader Unilever was probably inevitable.

Dutch dairy chief Hein Schumacher’s choice to succeed Alan Jope as CEO blocked upward progress for Pitkethly after eight years of accounting.

I came to know Pitkethly during the battle, first to take out Kraft Heinz and later when a revolt by British shareholders forced the board to reconsider plans to move to the Netherlands.

In defense of his UK listing, Pitkethly showed me a chart he kept of the company’s changing shape.

Over time Unilever’s hygiene and beauty products, with a legacy in Port Sunlight on the Wirral, grew faster than the food categories and would become dominant. That in itself was a reason to stay with Great Britain.

Pitkethly had a much better understanding of Unilever than the overrated activist Nelson Peltz who pulls the strings.

To transfer

Silicon Valley Bank (SVB) gave all its cachet to the technical elite when it went bankrupt in March.

So it’s no big surprise to read that the buyer of its UK branch is considering a name change to HSBC Innovation Bank. That sounds better and hopefully demonstrates the seriousness of purpose in supporting British biotech, fintech and AI geniuses.