When the billionaire Issa brothers parked up outside Asda’s Leeds headquarters in February 2021, they had just secured the keys to a business that seemed to present an incredible opportunity: a 600-stores-plus cash machine. The brothers from Blackburn were set on leapfrogging slightly bigger rival Sainsbury’s to make Asda the UK’s second-largest supermarket group. They promised £1bn of investment to fly the brand’s bright green banner above hundreds more convenience stores, many of which would be based on their own EG Group’s petrol forecourts, and to fill unwanted supermarket space with takeaways from their string of franchise partners, from KFC to Subway. Asda’s previous owner, the US retail group Walmart, had spent some time trying to exit Asda – including an abortive 2018 merger with Sainsbury’s. After that deal was scuppered by competition concerns, the Issa brothers provided the perfect opportunity for Walmart’s owners, the billionaire Walton family, to offload the chain near the top of the market. The deal was inked in October 2020 and a finalised the following February. The road since then has been increasingly bumpy, as the pandemic grocery boom (remember pasta and toilet roll stockpiling?) gave way to surging inflation, rising interest rates and a cost of living crisis. The boys from Blackburn Mohsin and Zuber Issa, who share a £5bn fortune, according to the latest Sunday Times rich list, grew up in a terrace house in Blackburn and started their empire with one petrol station in nearby Bury after working in their father’s garage. They made their fortune through buying up forecourts across the UK, and then globally, to build a business with more than 6,600 outlets funded largely by debt. Today, the brothers live in a complex of five newly built mansions that can only be glimpsed from their leafy Blackburn street as they are nestled behind high walls and security gates, with views of the nearby countryside and access to a pool, cinema and private prayer rooms. Just down the road, the brothers, whose parents came to the UK from India in the 1960s to work in the textile industry, are financing the building of a new mosque. They also reportedly own a £25m London mansion and used interest-free loans from EG Group to buy two Bombardier private jets. Having weathered a pandemic and a cost of living crisis since announcing their triumphant Asda deal, acquired with the help of their private equity partner TDR Capital, the brothers may be wondering about the state of their fortune. Asda’s sales flatlined last year at £20bn, while underlying profits fell to £886m from £1.2bn the previous year – and debts continue to mount. Debt millstone As Asda battles high cost inflation on wages, energy and wholesale food prices, rocketing interest rates have added to the pressure. With debt markets tight, the Issas and TDR Capital are being forced to plough £450m more cash into Asda to fund a takeover of their EG Group’s UK and Irish forecourts as they battle with the climbing cost of servicing a £7.4bn debt pile, including leaseholds, at Asda, according to credit rating agency Moody’s, and even bigger borrowings at EG. It is the supermarket escalator they don’t want to be on. Having already built a reputation as masters of debt-fuelled deals at EG, the Issas put just £100m of cash into the initial Asda deal, matched by £100m more from TDR Capital. The rest of the buyout was funded with the largest sterling corporate bond sale on record, according to Bloomberg, as well as a loan from the parent company of EG Group. The £1.7bn sale and leaseback of Asda’s warehouse network in 2021 was another key part of the financing. Finally, Walmart has kept a £500m stake in the Jersey-based business, which it had the right to hold for seven years along with a seat on Asda’s board. The Issa takeover doubled Asda’s debts, according to the Fitch rating agency. Structured right at the end of the low-interest era that began after the 2008 global financial crisis, the business has come under increasing strain, as its debts and the cost of servicing them has risen. By last year, Asda’s annual interest bill, including lease liabilities, had shot up to £300m from £90m in 2021, according to Amarveer Singh, an analyst at CreditSights. It is likely to be more than £400m this year. Next year, Asda’s total interest bill will probably rise again, by up to £90m, according to Singh, after the group added almost £800m of new debt to its balance sheet to fund the EG forecourts acquisition, all at a high interest rate of about 12% or more, according to CreditSights. One industry insider believes that almost £2m a week of extra payments will be like “a noose around the neck of the business”. However, while the group’s total debts will rise as a result of the EG forecourts deal, Asda’s debt-to-profit ratio is expected to improve with the acquisition. Accounts for Bellis Finco, the Asda holding company, show gross cash generation from operations of £1.6bn in 2022. The hope is that the acquisition of more than 120 Co-op petrol forecourt stores, agreed last year, and the addition of 350 stores that make up EG’s UK and Irish forecourts operation will bring additional profits and property assets into the business and boost its position in the faster-growing convenience store sector, where Asda to date has little presence. The retailer says comparison of debt holdings now with the days of Walmart’s ownership is not appropriate and it has a “sustainable capital structure, strong cash generation and clear strategy to grow [underlying profits], which, all combined, will enable the supermarket to reduce its debt over time”. In the background is a long-running legal battle in which mainly female shop workers say they are underpaid compared with their largely male equivalents in warehouses, which could result in more than £1bn in compensation payments for workers. Walmart has said it will pick up at least part of the tab. Asda says it will continue to defend against the claims “as retail and distribution are very different sectors with their own distinct skill sets and rates of pay”. An Asda spokesperson said the costs were “theoretical” as the case was still continuing. With Asda’s debt burden now significantly more onerous than its two bigger competitors – Tesco and Sainsbury’s – Clive Black, a retail analyst at Shore Capital, says the Issas appear to be “having to take decisions they didn’t want to”. Financial engineering The Issas have sought a variety of ways to raise cash to support Asda and reduce its debts, including selling core property assets. A £650m deal to sell – and lease back – about 25 supermarkets to US-based company Realty Income Corporation was finalised in late July. Analysts at CreditSights estimate the group will have to pay an extra £67m in rent as a result, although it will have extra cash flow from the EG forecourts. Next up at the checkout is the sale of ground leases on as many as 30 Asda stores to raise at least £300m. The transaction would reduce its rent on those stores to well below market rates, but mean they are subject to much longer than usual leases – more than 50 years – making it hard to move out of or sell the property without huge financial penalties. The Issas also expect to find £100m of savings from bashing together EG’s petrol forecourts and the Asda chain – much of which is likely to come from ensuring each business’s suppliers give their best deals to the combined group. Some head office job cuts may be on the way, but insiders do not believe the two groups’ HQs – in Leeds and Blackburn – will be merged in the short term, as the trip over the Pennines would prompt hundreds of experienced staff to exit. The group has ambitions to expand, searching for at least six new supermarkets of between 25,000 sq ft and 60,000 sq ft and hundreds more convenience stores, according to property sources. However, Black claims Asda’s projections on spending during these tough times indicate it is “not backing up [that ambition] with investment”. An Asda spokesperson said: “Asda’s owners are committed to the long-term growth of the business and are investing in both supporting customers and colleagues during the immediate cost of living crisis as well as growing a strong sustainable business with clear strategy for the long term.” Less competitive Back at the tills, shoppers complain of higher prices – especially on petrol – fewer staff and reduced choice on the shelves. Outside Asda’s flagship outlet in Pudsey, Leeds, one customer points to what he calls “extreme rises” and says: “You can’t stick 40p on an 85p pack of biscuits!” Others say they regularly visit the discounters or Morrisons in search of a better deal. Consumer group Which? puts inflation at Asda ahead of all the traditional supermarkets, with price rises of 27% between June 2021 and this June compared with an average of 22% at Tesco, Sainsbury’s, Morrisons and Waitrose. Of the main chains, only Aldi and Lidl increased prices faster, hitting 35% over the period. As its price position has weakened, Asda, which made its name as the cut-price champion, where shoppers could pick up everything from bananas to babygrows, is losing market share. Its slice has slipped to 14.2%, from 15% in October 2020 when the takeover was announced. During the same period, bigger rival Tesco has gained share and Sainsbury’s held steady, with only Morrisons performing worse. The chain is also under fire from MPs for taking bigger profits from petrol after a competition watchdog found it had put the brakes on price cuts when wholesale oil prices fell. Asda was handed £60,000 in fines from the competition watchdog for failing to provide requested information to the Competition and Markets Authority’s (CMA) fuel inquiry in a timely manner, though the company did later provide the CMA with the information. The company says its fuel strategy is unchanged in that it intends to be the “price leader” in the market but it is understood to have increased its profit margins on fuel between 2021 and 2022 to invest more in its grocery offer. “Despite record inflation, we have carefully managed our business to ensure Asda was the cheapest traditional supermarket for both groceries and fuel throughout the period reviewed by the CMA and this position is unchanged,” an Asda spokesperson said. Meanwhile, a number of senior executives have left Asda House in Leeds after losing out on regular share bonuses offered by Walmart and balking at the entrepreneurial style of Mohsin Issa, who likes to personally handle supplier negotiations in some cases. Asda said it has also brought new people in. One former staffer describes the new regime as “pretty brutal”, claiming that staff in some head office departments have been “cleared out”. “When Asda was owned by Walmart, it was very process-driven. Things could be really tedious with lots of paperwork and forms to fill in, committee after committee. The brothers came in and dismantled the process and really sped things up. Either you take to it or you don’t,” the former staffer claims. Another recalls the 1990s before Asda’s rescue from near bankruptcy by Archie Norman, now chairman of Marks & Spencer. “A load of people love the entrepreneurial spirit of the Issas, but plenty of people really see it was debt that nearly got Asda in the early 90s.” He says those people are nervous about what they see as errors in rapid dealmaking after “a lot of years of not taking any risks”. Some industry insiders praise the Issas’ quick thinking, for example, in bringing in the cut-price essentials range as Asda’s shoppers struggled with the cost of living crisis. Critics, however, say Asda’s market share stability is largely thanks to the greater struggles of smaller rival Morrisons. The brothers have brought in some strong retail nous with Chris Comerford, the new commercial director, who joined from Tesco. But Mohsin Issa has been running the chain himself since the departure of chief executive Roger Burnley in August 2021 as a long search for a replacement continues. With no experience in running a big supermarket chain the Issas have fared reasonably well so far. But one industry insider warns: “When you have wafer-thin margins it can start getting wrong quickly”.