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Marked down

30 Sep 2020 By Aimee Donnellan

Walmart is living up to its reputation as a discount retailer. The $389 billion retail giant looks set to sell a slab of its UK grocer Asda to buyout firm TDR Capital and two petrol station tycoons for around 6.5 billion pounds. It’s a cheaper and riskier exit than the group’s original plan for a union with peer J Sainsbury.

Quitting the UK has been a struggle for Walmart. Chief Executive Doug McMillon first attempted an audacious merger with Sainsbury’s in 2018 that would have valued Asda at 7.3 billion pounds, but British competition authorities stymied the deal. A sale to KKR then failed to emerge. Finally, Walmart has chosen a consortium comprising TDR Capital and the Issa brothers, founders of petrol station empire EG, as preferred bidders for a majority stake.

The delay means Walmart is selling at the worst possible time. Britain’s departure from the European Union will hurt consumer confidence, the pandemic is imposing expensive safety standards, and discounters Aldi and Lidl, and Amazon.com, are grabbing market share. Peers Tesco, Sainsbury’s and WM Morrison Supermarkets are valued at on average 6 times trailing EBITDA, down from 8 times two years ago, according to Refinitiv data. The mooted 6.5 billion pounds valuation, less than the price Walmart paid in 1999, would equate to just over 5 times EBITDA of around 1.2 billion pounds before the pandemic struck.

It could be a good deal for Asda’s new owners. Assume, conservatively, that TDR and the Issa brothers can keep sales flat at the pre-pandemic level of around 23 billion pounds, and boost Asda’s EBITDA margin to a respectable 6.5%. An exit at the same lowly multiple would still deliver a reasonable internal rate of return of around 17%, according to a Breakingviews calculation. That assumes the buyers juice their purchase with debt of around 3.5 billion pounds and use 30% of EBITDA to repay borrowing.

Walmart is not getting a clean break, as it will retain a minority stake. That may prove smart if the UK economy bounces back. Yet Asda will still be challenged – it is smaller than Tesco, is losing market share, and will now have lots of debt to worry about. While the Issa brothers know how to run petrol stations, they have little experience in operating large supermarkets, or online shopping. McMillon’s UK ordeal may not yet be over.


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