Asda Forecourt

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Asda plans to invest more than £150m in the next three years to integrate the combined business

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Asda has announced it has agreed to buy EG Group’s UK and Ireland operations for an enterprise value of £2.27bn.

The deal will bring together the two businesses, both owned by the by the Issa brothers and investment funds managed by TDR Capital.

The acquisition includes 350 petrol filling station sites and over 1,000 food-to-go locations.

EG Group will retain approximately 30 PFS sites in the UK for wider group development, which will not form part of the transaction.

The “transformational combination” of the two businesses will allow Asda to better serve a combined base of around 21 million customers each week, as well as leveraging Asda’s growing loyalty scheme and bringing together convenience, fuel, GM, grocery, foodservice and omnichannel retailing.

Following completion of the transaction, Asda plans to invest more than £150m within the next three years to fully integrate the combined business.

As part of the transaction, the shareholders are providing £450m of additional equity to fund it.

The acquisition will strengthen Asda’s financial profile with the contribution of £195m EBITDA after rents, with additional P&L synergies of £100m expected to be generated over the next three years.

The owners of the enlarged business said these synergies mainly arose through economies of scale of the combined entity, higher volumes and cross-selling opportunities from a large and highly complementary customer base.

Asda also expects to realise over £100m of working capital benefits as a result of its enlarged scale.

Stuart Rose, chair of Asda, said: “Asda’s acquisition of EG UK and Ireland will create a consumer champion like the UK has never seen. Throughout my career in retail, one thing has always been true, that meeting the evolving needs of customers is the route to growth.

“This transaction is all about driving growth by bringing Asda’s heritage in value to even more communities and accelerating the growth of its convenience retail business.”

Mohsin Issa, co-owner of Asda, said: “Asda is committed to saving customers precious time and money across their shopping baskets and on the forecourt. The combination of Asda and EG UK&I will be positive news for motorists, as we will be able to bring Asda’s highly competitive fuel offer to even more customers.

Gary Lindsay, managing partner at TDR Capital, added: “The combination of Asda and EG UK&I creates a convenience and food retailing champion, with nearly £30bn in annual revenues. The two businesses are highly complementary, bringing together Asda’s traditional focus on mid-to-large sized supermarkets and EG UK&I’s on convenience retail, foodservice and fuel.

The transaction is expected to close in Q4 2023.

It is hoped that Asda’s acquisition of EG UK&I will open up significant growth opportunities in the growing convenience and foodservice markets.

There have already been 166 EG sites successfully converted to ‘Asda on the Move’ and all acquired EG UK&I sites will come under the Asda fascia.

This is in addition to Asda’s acquisition of 119 convenience sites with attached PFS from the Co-op Group and successful launch of three standalone Asda Express convenience sites since October 2022.

Asda co-owner Mohsin Issa will continue to lead the business through its ongoing integration of the EG UK&I business.

The transaction will be funded by a combination of debt and equity, including £450m of equity being provided by the shareholders, £770m of term loan debt, as well as £1.1bn from property related transactions.

Meanwhile, Asda also today reported “strong” like-for-like sales growth and market share gains from the traditional ‘big four’ competitors.

Like-for like sales increased by 7.8% in the three months to the end of March compared with the previous year, while total revenues excluding fuel increased by 8% to £5bn.

Morning update

Unilever today announced that Graeme Pitkethly, chief financial officer, has informed the board of his intention to retire from the company by the end of May 2024.

The Unilever board will now proceed with a formal internal and external search for his successor.

Unilever CEO Alan Jope said: “I would like to thank Graeme for his tremendous contribution to Unilever over the last 21 years. As CFO, he has brought great leadership to our company and been instrumental in sharpening our strategy and driving a step-up in our operational performance.”

Unilever chairman Nils Andersen added: “On behalf of the board I would like to thank Graeme for his service to Unilever, and wish him well for the future. He has been a highly valued member of the board throughout the last eight years, and a strong and dynamic leader of our business. I look forward to continuing to work with him in the months ahead.”

Food to go operator Greencore has reported a 20%-plus jump in first-half revenues, but profits were hit by soaring costs.

Reported group revenue for the six months to 31 March increased by 20.1% to £925.8m.

Reported revenue growth was driven by a 14.5% benefit from recovery of cost inflation, a 5% benefit from volume increases (a combination of underlying growth, price mix and new business wins) and a 0.6% contribution from both distribution of third-party goods and the Irish ingredients trading business.

However, overall adjusted operating profit decreased from £17.2m to £11.8m as adjusted operating margin decreased by 90bps to 1.3%.

That meant the group fell to a group loss before tax of £6.2m, compared to a pre-tax profit of £1m in the corresponding period last year.

The drop in profitability as driven by increasing costs year on year as significant inflation has been experienced, which was not fully recovered in the period.

In addition, profitability was adversely impacted by commissioning challenges in the new ready meals manufacturing unit.

Greencore incurred a mid-teen rate of inflation in the period, which was largely recovered through pass through of cost increases and other mechanisms comprising product and range reformulations and alternative sourcing.

The largest component of inflation was in commodities across raw materials and packaging, some of which was recovered through pre-agreed recovery mechanisms in place with a number of customers.

Other elements of inflation were largely recovered through a combination of constructive direct dialogue and operational efficiencies.

The lag in inflation recovery in the first half is expected to be largely mitigated or recovered in the second half of the year.

First half revenue in the group’s food to go categories (comprising sandwiches, salads, sushi and chilled snacking) was up 15.6% to £580.4m and accounted for approximately 63% of reported revenue.

The group’s other convenience categories, comprising of activities in the chilled ready meals, chilled soups and sauces, chilled quiche, ambient sauces and pickles, and frozen Yorkshire pudding categories, as well as the Irish ingredients trading business, saw growth of 28.5% to £345.4m.

This increase was driven by higher revenue in ready meals, ambient sauces and the group’s Irish ingredients trading business.

CEO Dalton Philips commented: “We are pleased to have delivered strong revenue growth in the seasonally quieter first half of the year, and it is a clear demonstration of Greencore’s ongoing resilience in what is a difficult consumer spending environment. While much of the top line momentum has been driven by recovery of inflation, it is encouraging to have achieved good manufactured volume growth, which speaks to the enduring structural demand for the categories in which we operate.

“We are confident that we will continue to build on the momentum in the business in both revenues and efficiencies as we enter our peak seasonal trading period, and we expect to deliver a full year outturn in line with current market expectations.

“We remain confident in the long-term potential for the business and our immediate priority is to rebuild profitability and returns in order to create a platform on which to build for future growth. Critical to this rebuild strategy will be a combination of rigorous management of our customer, product and asset portfolio, and a reset approach to operational excellence, supported by continuing our unwavering approach to inflation recovery and cost management.”

Finally this morning, food inflation eased further in May, according to the latest BRC-NIQ shop price index.

Shop Price annual inflation accelerated to 9.0% in May, up slightly from 8.8% in April and reaching a fresh high.

This was driven by non-food inflation accelerating to 5.8% in May, up from 5.5% in April.

However, food inflation decelerated to 15.4% in May, down from 15.7% in April. This level is the same as the three-month average rate of 15.4%, and is the second-highest inflation rate in the food category on record.

Fresh food inflation decelerated in May, to 17.2%, down from 17.8% in April, while ambient food inflation accelerated to 13.1% in May, up from 12.9% in April.

BRC CEO Helen Dickinson commented: “While overall shop price inflation rose slightly in May, households will welcome food inflation beginning to fall. The slow down in inflation was largely driven by lower energy and commodity costs starting to filter through to lower prices of some staples including butter, milk, fruit and fish. Conversely, the price of chocolate and coffee rose off the back of the ongoing high global costs for these commodities. While non-food inflation rose, consumers are benefiting from heavy discounts in footwear as well as books and home entertainment.

“Fierce competition between supermarkets has helped keep British food among the cheapest of the large European economies. While there is reason to believe that food inflation might be peaking, it is vital that government does not hamper this early progress by piling more costs on to retailers and forcing up the cost of goods even further. The biggest risk comes from policies such as the incoming border checks and reforms to packaging recycling fees.”

Mike Watkins, head of retailer and business insight, NIQ, added: “To help mitigate the impact of inflation, shoppers are saving money by looking for seasonal promotions on the high street and taking advantage of the price reductions offered by supermarket loyalty schemes. Food retailing in particular is competitive, so hopefully the recent price cuts in fresh foods is a sign that inflation has now peaked, albeit ambient inflation may take a little while longer to slow.”

On the markets this morning, the FTSE 100 has opened flat at 7,624.1pts.

Early risers include THG, up 5% to 62.2p, Bakkavor, up 4.2% to 94.8p and Greencore, up 3.3% to 78.3p.

Fallers so far today include Hotel Chocolat, down 2.5% to 155p, PZ Cussons, down 2% to 188.8p and Nichols, down 1.7% to 982.7p.

The week in the City

A busy Wednesday after the Bank Holiday brings annual results from B&M European Value Retail, while WH Smith will released its Q3 trading figures and NIQ publishes its latest monthly grocery sales figures.

Also tomorrow brings the quarterly FTSE index review, which is set to see Ocado drop out of the FTSE 100.