The Asda story is an object lesson in the dangers of too much leverage at a time of lurching interest rates.
The chairman of Asda has said he’s “embarrassed” by a decline in sales at his supermarket chain, and has urged Moshin Issa, the co-CEO, to step back from operations.
So what? The Asda story is an object lesson in the dangers of too much leverage at a time of lurching interest rates. The group is struggling to service a vast £5.9 billion debt pile, mainly accrued during its buyout by the billionaire Issa brothers and the private-equity firm TDR Capital in 2021. Back then, money was cheap. Now Asda’s debt is weighing on performance.
By the numbers:
- £390 million – Asda’s interest bill due in 2025, up 56 per cent from last year
- 12.6 per cent – Asda’s UK market share, down from 13.7 per cent a year ago and 17 per cent in 2013
- £4.2 billion – Asda’s sales in the 12 weeks to August 4, down 6 per cent on the same period last year
By contrast, sales at Tesco, Sainsbury’s and Lidl are all up. Even Morrisons, which has also been on a PE-led debt binge, has turned a corner – sales there rose 1.4 per cent in the same 12-week period. Morrison’s new boss, Rami Baitiéh, has been praised for “leading from the front” and a “back to basics” approach. Asda’s leadership, meanwhile, looks unsettled. In the last year:
- Rumours swirled about a split between the Issa brothers, culminating in one of them, Zuber, selling his stake.
- Unions then accused TDR Capital, the PE firm that bought Zuber’s 22.5 per cent holding, of asset stripping and declining workplace standards.
- Bosses were hauled in front of MPs and asked to explain “opaque” company structures, interest-free loans for private jets and the overcharging of customers for petrol.
Thorny Rose. Stuart Rose, the former M&S CEO who’s now Asda’s chair, has called for a “full-time fully experienced retail executive to come in” to replace Moshin in the day-to-day running of operations. He added that disentangling the supermarket’s IT systems from those of its previous owner, Walmart, had come at £800 million cost and was distracting from a focus on the customer.
The project needs to be finished by the end of the year, or Asda will face steep fees from Walmart, which retains a 10 per cent stake. IT changes caused payroll chaos earlier this year when hundreds of employees were paid incorrectly.
Fraternal fracas. In August 2021, Roger Burnley, Asda’s well-regarded chief executive, stepped down after reportedly falling out with the brothers over strategy. Then came reports of a rift between the brothers over Moshin’s divorce and subsequent engagement to an EY executive. While the Issa brothers deny they are estranged, there’s no doubt their disruptive approach has led to casualties.
“Asda has got a real issue with its brand and its identity. The owners seem to have lost sight of what they stand for,” says Nadine Houghton, national officer at GMB, the union now calling for jobs to be protected as Asda “fights for survival”.
What’s more… Asda is by no means alone in getting caught out by rising rates. Overleveraged utilities are a blot on the UK’s economic landscape and this week, Patrick Drahi, the billionaire owner of Altice, sold his 24.5 per cent stake in BT to pay down debt. Talks with Altice’s creditors are reportedly strained. Drahi has also done a $1 billion deal with Abu Dhabi’s sovereign wealth fund to deleverage and retain his stake in Sotheby’s.
Business builders like Drahi and the Issas were handed carte blanche to expand in the decade of cheap money that ended in late 2021. But debt has a new price – and that can include failure.
