Asda’s takeover by billionaires Mohsin and Zuber Issa and private equity group TDR Capital will have implications for UK rivals including Tesco (TSCO), Sainsbury’s (SBRY), Morrisons (MRW) and Marks & Spencer (MKS).

US retail titan Walmart has announced the sale of a majority stake in Asda, Britain’s third biggest grocer, in a £6.8 billion deal that is subject to regulatory approval and expected to complete in the first half of 2021.

The Issa brothers are famed for building up petrol station empire EG Group which is co-owned by fellow Asda buyer TDR. Walmart will remain a minority investor in the UK supermarket with a
seat on the board.

Asda has struggled to gain market share in UK grocery for some time, with price cutting and negative operational gearing in a highly competitive market taking a toll on earnings.

The new owners have stated they will invest about £1 billion in Asda over the next three years, which should keep rivals on their toes, although broker Shore Capital points out this is behind the annual investment spend of Asda’s major quoted peers and German discounters Aldi and Lidl.

Asda is unlikely to add much new capacity to the industry either, according to Shore Capital, ‘so helping to sustain the positive balance between market value and space’.

While the Issa brothers are likely to lower prices to make Asda more competitive, the broker doesn’t believe the value-focused supermarket will be ‘irrational’ in terms of slashing prices. This should allay investors’ worst fears that a margin-eroding price war will happen.

Asda has opportunities to grow in forecourt convenience, online and through partners including Greggs (GRG) – EG already boasts strong ties to the baker – but these are ‘unlikely to shake the stability of the industry’ according to Shore Capital.
"Most businesses today have more intangible assets like brands and databases than tangible assets such as plant and machinery".
Intriguingly, the broker does float the possibility that the Issa brothers could explore a grocery, forecourt and bargain store combination with high-flying B&M European Value Retail (BME) longer-term, which would certainly shake things up.

Should Asda’s new ownership result in greater online success, this could have implications for rivals including online grocery delivery specialist Ocado (OCDO), whose shares reacted negatively
to claims from Norwegian robot technology company AutoStore that Ocado has infringed its technology rights.

Ocado has assured the market it has ‘multiple patents protecting the use of our systems in grocery’, which it will ‘always vigorously protect’ while it investigates the claims.

Shore Capital concludes that for the wider grocery market, the Asda sale is ‘a development that it can quite comfortably accommodate, but let’s see’.

For the listed supermarkets, it is ‘no worse than a neutral development and we retain our positive sector stance, noting liquid, solvent, growing and increasing free cash generative businesses.’

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