By Aimee Donnellan
(The author is a Reuters Breakingviews columnist. The opinions expressed are her own)
LONDON, Feb 27 (Reuters Breakingviews) - KKR is eyeing up a pricey UK grocery shopping trip. The private equity giant might bid for Walmart'sAsda unit if competition authorities block the British grocer's sale to rival J Sainsbury. To get a decent return on its hefty equity cheque, KKR would have to boost sales and margins. The UK's wobbly retail outlook makes that look a stretch.
Assume the firm run by Henry Kravis and George Roberts pays 6.5 billion pounds. Asda has no debt to speak of, so that's an enterprise value of five times the supermarket's EBITDA for 2017 - the last year for which figures are available. If Asda borrows three times its EBITDA, and Walmart keeps a 49 percent stake, KKR would still have to come up with about 1.5 billion pounds of equity. That is a hefty outlay for a target that only managed to lift sales by 1 percent in the last three months of 2018.
If Asda stays on that growth trajectory and its EBITDA margin holds steady at 5 percent, its enterprise value would reach 6.8 billion pounds after five years, on the same five times multiple. Assuming KKR diverts 30 percent of the company's operating cash flow to paying down debt, Asda's equity would be worth about 5.1 billion pounds, according to Breakingviews calculations. That's a measly 12 percent annual return, well below the 20 percent buyout firms tend to aim for.
To do better, Asda would have to make more money. If the supermarket boosted its EBITDA margin to 6 percent, and lifted sales by 3 percent a year, KKR could hit its return target. But given the looming threat posed by Brexit and the rapid advance of discount retailers like Aldi and Lidl, turning around Asda would be a challenge. KKR would be better off putting its cash into a sturdier basket.
- KKR is plotting a bid for Walmart'sAsda unit after plans to merge the UK supermarket with rival J Sainsbury faced objections from competition regulators, the Sunday Times reported on Feb. 24.
- KKR is thought to be working with former Asda boss Tony De Nunzio, now a senior adviser to the buyout firm, the report said.
- The newspaper, which did not cite its sources, said Asda would have a lower valuation than the 7.3 billion pounds price tag set by the Sainsbury's deal because it would not enjoy the same economies of scale.
- Britain's Competition and Markets Authority on Feb. 20 published the preliminary findings of its probe into the Sainsbury's merger with Asda, concluding that there could be a significant lessening of competition if the deal went ahead.