Asda’s private equity co-owner has valued its stake in the grocer at almost 20 times the amount it paid last year, an exceptional paper return enabled by the extensive financial engineering used in the takeover.

Marylebone-based fund TDR Capital and billionaire Blackburn-based brothers Mohsin and Zuber Issa used an unusually small amount of their own money in the £6.8bn acquisition.

They funded the rest by piling debt on the supermarket chain and selling off some of its assets in what was the UK’s biggest leveraged buyout for more than a decade.

Now TDR has told investors that it has already marked its stake at 19.8 times its original investment. A marketing document for TDR’s latest fund, seen by the Financial Times, pegs the valuation of the stake at about €1.7bn (£1.4bn), implying TDR may have put in only tens of millions of euros.

Such a return would far exceed most leveraged buyouts. Private equity acquisitions of consumer businesses, including supermarkets, made on average 1.8 times their money between 2009 and 2021, according to research by Bain & Co.

Public companies selling to private equity “on the cheap” has become an issue in the UK after a series of controversial buyouts. In the Asda case, however, the UK grocer was owned not by UK investors but US retail group Walmart, which was keen to offload the chain.

Since the acquisition, the supermarket sector’s valuation and Asda’s profits have improved, supporting a valuation increase. However, the outsized potential return for TDR is based on the exceptionally thin sliver of equity in the deal.

Together, the Issa brothers and TDR put in less than £800mn of equity for the £6.8bn deal. That is already much lower than an average buyout but the TDR documents suggest that most of its €334mn contribution came not from its own fund but from EG Group, a petrol stations business also owned jointly by the Issas and the private equity firm.

The document shows that EG has already proved a cash cow for TDR. The private equity firm says it has extracted five times the €234m it invested in 2014 and it ultimately expects to make 10.6 times its money.

Asda received an upfront windfall when it sold 27 warehouse properties with a book value of £497.5mn to Blackstone for £1.7bn last year. TDR and the Issas had originally budgeted for warehouse sale-and-leasebacks to contribute £950mn towards the cost of the acquisition.

TDR told the FT it “makes regular reports to our investors on the performance of our investment portfolio” and that “these are made in accordance with established and consistent valuation metrics including but not limited to comparable transactions and public market comparisons”. EG and the Issa brothers declined to comment.

The acquirer’s valuation may yet prove optimistic. Morrisons said this month that inflation and “the geopolitical environment” were already affecting consumer spending and could have a “material adverse effect” on its results and also “adversely impact the wider grocery market”.

Asda’s core earnings rose 22.5 per cent last year to £1.3bn, according to its annual report, though part of that improvement came from a reduction in operating costs relating to Covid-19.

Valuing Asda at 9.1 times core earnings — the same multiple that rival buyout group CD&R said it paid for rival Wm Morrison last year — would make it worth £11.8bn, including debt, more than 1.7 times its £6.8bn value when the Issas and TDR acquired it.


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