7 September 2022 Asda Co-opts 132 Stores from Co-Op

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Asda Co-opts 132 Stores from Co-Op​

What do you need to know this week?

Last week, the global supermarket brand Asda announced it intends to buy 132 retail sites owned by Co-op in a transaction with a cash value of £438m. Nearly all the sites Asda is set to own are stores with petrol filling stations, in addition to retail premises.

The cash valuation of the deal at £438m does not include £162m in lease liabilities, which refers to an accounting treatment that evaluates long-term leases as valuable assets. The deal will be funded by a mixture of cash reserves and bank financing.

In its own announcement, the Co-op stated that the sale marks a pivotal step in the group’s long-term decision to divest from its operation of petrol forecourts. The Co-op will use the proceeds from the sale to pay down its existing debt and re-invest in the Group’s “growing wholesale, franchise, and e-commerce operations”.

Why is this important for your interviews?

2021 saw record numbers of deals and record deal valuations, which translated into record fees for transactional teams. However, inflation, interest rate rises, surging energy prices, and geopolitical conflict have transformed the deal-making market over the course of the year, as would-be buyers grow increasingly hesitant to pursue big-ticket acquisitions in the face of what many believe to be an imminent economic downturn.

Asda’s announcement is therefore a welcomed signal to legal and financial advisers that there is still some appetite in the market for bold acquisitions, even amidst the present market uncertainty.

Articulating the likely rationale for the deal from the perspectives of both parties will enhance your interviewer’s insight into your commercial understanding. From Asda’s perspective, the purchase is in line with Asda’s wider strategy to expand its national presence in the convenience market, which as of 2021 was valued at £43.2bn.

From the Co-op’s perspective, we may characterise its stated intent to use the sale proceeds to pay down its outstanding debt as a de-risking measure. According to its FY 2021 accounts, the group has nearly £1bn in outstanding interest-bearing debt, most of which is bonds with interest rates ranging from 5 – 11%, which is rather high. A cash sale would provide the group with ample liquidity to redeem or refinance its existing debt while leaving it with sufficient cash reserves to weather any potential downturn.

How is this topic relevant to law firms?

As The Lawyer details, Skadden is Asda’s principal legal adviser to its purchase. The deal team is led by George Knighton, who has an established relationship with Asda’s owners, the Issa brothers.

Latham & Watkins is advising Asda on the bank financing, and Allen & Overy will advise on employee pension implications. Given that the deal has a significant real estate component, Charles Russell Speechlys will advise Asda on the real estate components.

Addleshaw Goddard serves as the principal adviser to the Co-op.