Asda’s £2.3bn acquisition of EG Group’s UK arm has created a powerhouse of a business, spanning 700 forecourts, 581 businesses, and close to £30bn in sales from a consolidated consumer base.

It also brings EG UK’s foodservice businesses - which make up a majority of its gross profit (62%) - under the supermarket brand.

While both businesses already shared the same owners and management teams, the consolidation sees Asda become a “multichannel champion”, exponentially increasing its presence in the convenience sector, according to chairman Stuart Rose. 

The company says it has effectively ensured its resilience through diversification and clever financial engineering that doesn’t “materially worsen” its debt profile.

Other potential benefits include the synergies of a complementary acquisition: a strengthened value proposition, economies of scale, and cross-selling opportunities.

Cross-selling opportunities for EG brands

So what does the combination of businesses mean for EG’s 1,132-strong foodservice division in the UK & Ireland, a key strategic focus for the Issa brothers behind the group?

The deal further blurs the lines between the retail and foodservice sectors, providing a host of potential cross-selling opportunities.

Asda has taken over a foodservice business already diversified, comprising a range of offerings. Aside from third-party QSR stalwarts Burger King, KFC, and Subway, EG also counts the somewhat more upmarket Leon under its umbrella or proprietary brands, alongside bakery concepts Cooplands and Cinnabon. Rounding off the list are Indian QSR brand Chaiiwala and pizza brand Sbarro, plus franchises of Greggs, Krispy Kreme, and Starbucks.

Since the Issa brothers and TDR Capital took over Asda in 2020, 166 EG sites have been converted to Asda on the Move formats, stocking Asda’s own-label products.

While Leon’s retail offering has already been expanded to Asda, the latter is likely to further expand on synergies when it comes to value offers – like Cooplands – that would fit well within Asda’s walls.

Aside from Asda, supermarkets have been finding solutions in hospitality brands for a long time, a process sped up following the move to digital sales since the pandemic.

“You can see all the large format UK supermarket chains teaming up with different hospitality brands to open outlets inside their larger out-of-town stores,” Kien Tan, analyst at PwC, tells MCA.

“More generally, they have found that their larger hypermarket-style stores developed in the 1990s and 2000s are now too large and have excess space, particularly now that a lot of non-food sales have moved online.

“Using that space for hospitality brands - casual dining restaurants, food to go, fast casual etc – is a win-win because it both uses excess space and makes the store more of a destination – with established high street brands being more attractive to some consumers than the in-store cafes that might already have been there.”

EG’s ownership of Leon and Cooplands provides natural synergy and potential for Asda to expand its hospitality tie-ups.

Notably, EG relooked at its strategy for its proprietary bakery concept earlier this year, pivoting away from plans to open 30 new Cooplands outlets per year through to 2026. Instead, it said it would review Cooplands to ensure the estate was aligned with a ‘modern bakery food-to-go retailer strategy’.

Shore Capital analyst Clive Black agrees Cooplands is likely to pop up in Asda, telling MCA: “I would have thought Cooplands in particular [has the potential] as a Northern and value savouries brand, maybe less so Leon, which is more premium. Over-leverage has probably curtailed the Issa/TDR brand acquisition activities, noting it sought to acquire Caffe Nero.”

Long before reports of the impending acquisition, this underscored EG’s renewed focus on retail – where Asda continues to reign supreme in terms of value.

When asked what this means for EG’s foodservice operations, Black says: “Time will tell. In theory the foodservice brands can still feature in EG outlets, and in time within the Asda superstore estate too, albeit to date this has been very limited. The Asda retail fascia should be capable of complementing those of Cooplands, Leon etc.”

Opportunities to drive EG’s profits

With only early indications to suggest what a combined format might look like, it’s safe to speculate Asda and EG together will offer up the convenience store of the future, serving multiple missions and occasions in a single destination.

EG’s Q1 trading update saw foodservice sales up 15% year-on-year, with foodservice gross profit up 10% to $192m (£150m), driven by new outlet openings. This is enough to maintain Asda’s existing leverage ratios (4.3x after finance leases and ground rent liabilities).

However, profits in the US and Australia have been offsetting weaker trading in the UK, with the group previously stating it sees its international markets as primary targets for growth.

In a statement announcing the deal, co-founder Zuber Issa said: “The sale of EG UK & Ireland to Asda is an important step for the group and provides a platform to further invest across our diverse international portfolio, where we continue to see compelling opportunities to accelerate our proven and successful strategy to roll out foodservice, grocery and merchandise to create multi-purpose convenience retail sites across our estate.”

Proceeds from the sale will be used to pay off some of EG’s $9bn (£7bn) debt, which has come under further pressure from the rise in interest rates.

As CreditSights analyst Amarveer Singh notes: “The new equity money was a surprise and serves as a favourable signal to investors, while the fairly long six-year maturity of the (understandably expensive) term loan provides some refinancing breathing room for the existing bonds maturing in 2026 and 2027.”

Cost saving opportunities are also aplenty, from fuel and food to distribution and staffing.

“To the extent that synergies have not been harvested in fuel and grocery buying, there may be cost of goods benefits to emerge,” Clive Black explains. “In the food arena, the incorporation of the Asda on the Go and Asda Express sales could kick into the buying of convenience lines, chilled and grocery. There should also be savings at the central offices from the removal of duplicated roles, and distribution costs too.”

While the merger might provide new runway for foodservice brands, it isn’t good news for all businesses.

“As store conversions build benefits should ensue, SPAR looks like being a grocery victim as Asda replaces it in EG forecourts,” Black says.

The analyst still sees an uphill battle to make a dent in EG’s debt pile.

“I do not see why EG would see any notable change in the UK following the merger noting the synergy potential,” Black says. “The incorporation had long been spoken about but rising interest rates and over leverage meant needs must, subject to probably CMA approval, noting the sale & leaseback in the USA to reduce debt too.”

What next for the combined entity?

Zuber Issa has been quick to emphasise EG’s long-term plans remain unchanged.

“Following the Asda transaction, we will continue to operate across three continents and nine countries, benefiting from a strengthened balance sheet, strong cash generation and $6bn of freehold property,” he said, commenting on the group’s Q1 update. “This provides continued geographic diversification, scale and an unrivalled platform from which to grow.”

Indeed, the Asda estate’s freehold value remains due to EG’s mainly freehold forecourt estate. In addition to the view that EG’s debt does not materially worsen Asda’s existing debt profile – with uncertainty in fact mitigated through added diversification and resilience – both Rose and Issa are confident Asda will make strong progress in increasing its convenience presence.

As Black notes: “The fulfilment of synergy work should boost EBITDA, and so the capability to service debt. However, debt holidays and rising interest rates are pressurising the Issas and TDR Europe in a way that they probably did not plan and so the various steps to reduce leverage.”

Despite Issa’s reassurances, not all was part of the initial plan.

“Current debt levels are also limiting acquisition plans, noting the recent completion of the acquisition of the Coop forecourts. This is also reflected in the purported £650m sale & leaseback of Asda stores, which most definitely was not part of original plans, so cash in but an c£40-45m annual rent bill.”

As for consumers, the implications are that retail and hospitality will altogether cease to be clearly demarcated – ushering in a new age of convenience for an omnichannel powerhouse.