Private Equity Firms Eye £5B Asda Deal With Real Estate A Main Draw

Private equity firms including Lone Star and Apollo are weighing bids for supermarket chain Asda, with the company’s real estate portfolio a big part of the appeal. 

According to the Sunday Times, Lone Star, Apollo and TDR are all considering bidding for a stake in Asda, which is being sold by U.S. parent Walmart, and could be valued at more than £5B. All of them have a history of buying businesses backed by significant real estate portfolios.

Other private equity firms with big real estate practices like Blackstone and Carlyle have passed up the opportunity to bid, according to the Sunday Telegraph.

Its property portfolio is very much part of the appeal of Asda. The company has 639 UK stores, around 340 of which are large superstores. 

Crucially, it owns the freehold of 75% of those stores, a much higher proportion than UK grocery rivals like Sainsbury’s and Tesco, which own 51% and 57% of their stores, respectively.

That high proportion of freehold ownership offers the potential to unlock value by selling and leasing back a large number of its stores. Walmart does not provide a valuation of Asda’s store portfolio, but outside investors have historically looked to get supermarket chains to sell property assets because they are held at less than market value on company balance sheets. 

There are numerous investors currently buying UK grocery store assets. Supermarket Income REIT has built up a portfolio of 10 assets valued at £490M since it floated in July 2017. U.S. REIT Realty Income has bought more than £500M of UK supermarkets in the past year.

Another property play when buying a grocery chain is the redevelopment angle. There is the potential to add significant amounts of residential on top of or around supermarkets, especially those in dense urban areas. Private equity firm Meyer Bergman, for instance, is undertaking new residential developments on top of supermarkets around London.

The purchase of Asda would provide a pipeline of potential sites for Quintain, the build-to-rent business owned by Lone Star. 

Of course, buying a supermarket chain is not just a property play: You have to run a supermarket business as well, in an increasingly competitive environment. Asda was historically the cheapest of the UK’s big four grocery chains, but its competition has increased dramatically from rivals like Aldi and Lidl.  

Last year a deal for Asda to merge with Sainsbury's was blocked by the competition watchdog.