If a pair of entrepreneurs and a private equity sponsor have just made a big splash with a multi-billion dollar acquisition of a British household name — the Asda grocery chain — the last thing they need is for the auditor of their heavily indebted flagship company to quit.

But that’s what just happened at EG Group Ltd., which operates 6,000 gas stations in 10 countries. It is owned by brothers Mohsin and Zuber Issa, and private equity group TDR Capital.(1) The Issa brothers’ story is a rags to riches tale: Over the past two decades they have gone from owning a single petrol station on the outskirts of Manchester in northern England to being in charge of a fuel-retail behemoth with 20 billion euros ($23.7 billion) of revenue in 2019.

Flush with their success, the brothers — along with funds managed by TDR — have now bought a majority stake in Asda, Walmart Inc.’s U.K. supermarket chain, in a surprise deal that valued the target at 6.8 billion pounds ($8.9 billion). Asda isn’t being acquired by EG Group, but it will have the same owners.

So it was worrying to hear Deloitte had resigned as EG’s auditor because of concerns that the company’s controls hadn’t kept up with its breakneck growth, according to the Financial Times. Asda is Britain’s biggest grocery chain after Tesco Plc and J Sainsbury Plc. It’s important that its new owners can answer any questions about how they run their businesses. 

The area of contention is whether EG has moved quickly enough to appoint independent directors and a chairman. The company wanted to wait until it was clearer on its strategy and future options for a public listing in order to recruit the right people. Deloitte declined comment. There are four board members, according to EG’s most recent accounts: the Issas and two TDR representatives.

EG said KPMG had been appointed as its new auditor, and Deloitte continues to serve as auditor of its Australian business.

EG looks like a business that needs full board oversight. It has grown fast, making more than 6 billion euros of acquisitions in 2018 and 2019, adding sites in Europe, the U.S. and Australia. Consequently, its net debt has risen from about 1.5 billion euros in 2017 to 8.1 billion euros at the end of last year. Add another 1.3 billion euros of lease liabilities and this equates to more than 10 times its Ebitda. That’s a high multiple. On the plus side, it does have 4.2 billion euros of property, plant and equipment from its freehold estate.

The company sought to reassure bond investors last week after Deloitte’s departure, saying it had generated $1.1 billion in Ebitda in the first nine months of this year. 

The Asda purchase is being funded separately. But the buyout vehicle used for that acquisition will also take on debt. Walmart has retained a stake of up to 20%, and the Issas and TDR have committed equity.

Even so, that could leave Asda with borrowings of about 4 billion pounds. Handily, the supermarket had about 7 billion pounds of freehold property on its balance sheet at December 31 2018. Its pension liabilities remained with Walmart, which has struck a deal to transfer them to an insurance company.

The buyers’ timing may be fortuitous. Supermarkets are major beneficiaries of consumers spending more time at home. There may be more scope to eke out growth by developing Asda’s convenience stores and filling some excess space in supermarkets with meals-to-go outlets.

But it won’t be easy. Given the borrowing commitments, and the interest payments, the new owners won’t want to cut Asda’s prices too aggressively. That leaves less room to compete with the German discount chains Aldi and Lidl. Although the Issas have experience in convenience stores and food-to-go, they have no track record in “big box” supermarkets.

If they can get over these hurdles, and use some of Asda’s prodigious cash flow to cut leverage — it generated more than 1 billion pounds from operations in 2018 — they could merge Asda with EG and list it as a giant fuel-and-food retail empire. Or they could hold Asda separately and make use of its cash.

To get to the point where they have the choice, they will certainly need the appropriate financial and governance controls.

(1) Mohsin and Zuber Issa each own 25% of EG’s Jersey-based parent company, with TDR having the remaining 50%.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Andrea Felsted is a Bloomberg Opinion columnist covering the consumer and retail industries. She previously worked at the Financial Times.

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