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The inside story to the Asda takeover – How Muslims Should Respond

Rags to Riches, Conventional Debt and Private Equity – The Inside Story To The Issa brothers’ Asda Takeover

What happened?

Two Muslim brothers hailing from Blackburn have agreed, as part of a consortium, to buy a majority stake in Asda. They partnered up with TDR Capital – a private equity firm – to make the successful bid of £6.8bn. The deal is being financed through lending provided by a syndicate of banks including Barclays, ING, Lloyds Banking Group and Morgan Stanley.

The Issa brothers are a genuine rags to riches story – starting from humble beginnings with just one petrol station to building an empire that today generates revenues of over $25bn.

The Asda deal is a classic example of a leveraged  buyout (“LBO”) – a private equity strategy that has been used by private equity firms to make significant returns over the last few decades. The EG Group (the Issa brothers’ company) itself has made over 10 such takeovers or mergers over the last few decades.

We have no reason to believe that EG Group and TDR used sharia-compliant finance to fund the acquisition of Asda. The FT reported that the deal was funded by a mixture of high-yield bonds and leveraged loans.

In this article we will explore:

  1. How private equity and LBOs work
  2. What role debt has had to play in the EG Group’s success
  3. Whether there were sharia-compliant alternatives open to EG Group; and
  4. How we as a community should approach and understand the complex issues around conventional financing in Muslim businesses.

How does private equity and LBOs work?

Private equity relies on debt financing to magnify its returns.

Let’s run an example to bring this to light.

If a company is making £10 profit and you buy it for £100, then the next year you make £10 and make a 10% return annually.

But now let’s use a LBO strategy. If you borrow £80 and just put down £20 of your own money, then you will have to pay an annual interest payment to the lender. Let’s say you pay 5% to the lender on their £80. You would have to pay £4 of the £10 profit you make. You would then be able to keep the remaining £6 as your own profit.

So now, having put down just £20, you get access to a return of £6, which is a 30% return. That is 3x more than you would have made.

So your money does more for you and you could buy 5 different businesses worth £100 now, putting down just £20 in each business.

You could end up making £30 profit from £100 investment instead of just £10. You could then use that £30 to finance further LBO deals to acquire more assets.

If things go well you could amass a huge empire very quickly with relatively little money.

But there is a big risk to this too.

If one year you do not make £10 profit – perhaps you make a £2 loss – you still have to pay £4 to the banks.

That means you have to conjure up money from outside of the business. And if you are heavily leveraged up already with all your cash tied up – that can be a very precarious position to be in.

LBO and debt-financing are a key part to the EG Group strategy

As this following excerpt from a BBC article explains, the EG Group has a significant amount of debt – £9 for every £1 of cash earnings in fact – and uses this debt to continue an aggressive growth strategy:

In 2019, EG Group reported sales of €20bn (£18bn), up from €12bn a year before. While fuel accounted for €16bn of sales, the business is geared towards adding on other sales, from brands including including Subway, Burger King and French supermarket Carrefour. Borrowing costs on €8bn of debt pushed the firm into a fiscal loss for the year, of €496m.

The firm has about £9 of debt for every £1 of cash earnings, says Azhar Hussain, head of global credit at Royal London Asset Management. Most companies would have £3-6 of debt for each pound earned before eyebrows are raised and questions are asked about repayment, he said.

This is a risky and bold business strategy. The idea is that EG Group uses debt to continue to acquire solid, cash-generative businesses. They can then use that cash to service their debt and continue acquiring.

This leads to (a) increasing economies of scale; (b) stronger negotiation power with producers of the products they stock; and (c) greater brand power.

Ultimately they can stop acquiring and actually reap in the profits – this then turns EG Group into a cash cow and over the course of a decade or so of reducing their debt mountain, EG Group becomes a much more stable and profitable business (they’re currently making a lot of revenues but posting a loss due to the debt payments).

The alternative move for the Issa brothers is to list the EG Group and cash in that way.

Are there alternative ways of structuring these deals that could make it sharia-compliant?

Okay, so it sounds like the EG Group has a bold (if risky) business strategy that is working. But what about the sharia compliance issues?

Firstly, to reiterate – we do not know for sure that this deal definitely involved haram financing – but we have every reason to believe that is the case.

EG Group is one of the biggest borrowers in the Euopean corporate leveraged loan and junk debt markets and has used LBO and conventional debt to buyout at least 10 previous companies.

Could they have structured this deal in a halal way?

Yes. Because the asset being bought here is considerable amounts of real estate. Asda, and any other large retailer is in fact a glorified real estate company if you study their economics and the way they operate as businesses.

Consequently, an ijarah (lease) structure could have been used quite easily.

Alternatively a Murabaha (mark-up sale) could have been used.

At worst, a commodity murabaha (a structure disliked by many scholars but ultimately seen as halal) could definitely have been deployed.

Yes – if the EG Group was doing a smaller deal and were a smaller company it would have been difficult to secure halal debt financing. But once you get into the £50m + range of debt-financing, it is very feasible to get the deal structured in a halal way.

The same corporate law firms, banks, and professionals involved for the mainstream debt have teams with expertise to structure in a halal way.

Additionally, given the scale and prestige of this deal they would have likely done it for the same rate. In any case, even if it cost a bit more – the costs would have been negligible relative to the scale of the deal.

But what about the pork?

There is an additional wrinkle around buying a business that sells haram products (e.g. alcohol and pork).

As these products likely do not constitute the majority of the business and are likely under 5% of the total revenue of the business the profits from these sources can be purified by giving them away. (We haven’t done the analysis on the revenues so this is an assumption. Public data on revenue breakdown between haram and halal is usually never provided by  companies).

Where the profits are above 5% then it is a little bit more tricky but again working with experienced sharia scholars and corporate dealmakers can result in structures that allow for these sales whilst at the same time making sure that the money from such assets is not part of the actual profit of the business –  certainly those portions of it that accrue to the Muslim shareholders.

So should we boycott Asda and criticise the brothers?

No – for a number of reasons.

Firstly, we should make as many excuses for our brothers and sister as possible. It is possible that for PR reasons the EG Group has actually used sharia-compliant debt but not disclosed that to the wider market. One could imagine the PR nightmare that would cause among certain Asda customers.

Secondly, we don’t criticise non-Muslim owners who did exactly the same thing. Why on earth would we now boycott or criticise Asda because someone else is doing the same thing?

Thirdly, the brothers give 2.5% of their profit to charity every year – amounting to £20m. That tells me that they clearly care about Islam and its teachings. Like any of us, they are not perfect, but clearly they are on a journey.

Fourthly, the brothers started off in a world where Islamic finance perhaps was not as prevalent (or they did not know about it) and have since built their business which has become completely wedded to conventional debt finance so much so that it is very difficult to extricate oneself now.

Fifthly, many many Muslims businesses also use conventional finance. So there is no reason to particularly censure these guys just because they’ve been particularly successful. Take any of the Muslims in the Sunday Times 100 rich list – and pretty much all will have used conventional finance.

So how do we respond to this news as Muslims then?

This news should be a wake-up call to us as a community about the incredible potential of halal investment and halal finance.

What EG Group did is possible with sharia-compliant debt too. But there’s a big problem.

Halal financing for businesses under the £50m mark (where you can negotiate bespoke terms) remains very few and far between in availability.

In absence of that, Muslims should of course avoid haram debt – but it also at least provides some understanding to why Muslim businessmen opt for conventional finance.

Sharia-compliant business finance is now slowly emerging with companies like:

  1. Qardus (who we point any of our SME finance queries to) and who provide short-term financing
  2. Izdihar who are still to launch but will provide a sharia-compliant equivalent to Clearbanc; and
  3. IFG.VC which provides equity finance to early-stage startups.

However we are barely scratching the surface. We still don’t have any substantial scale in the financing we provide to Muslim businesses, we don’t have anyone providing acquisition finance, long-term revolving facilities or finance between £500k – 50m.

So really practically then what do we do?

  1. If you are an investor – support people like Qardus and IFG.VC by adding to the liquidity available to provide financing to Muslims businesses. You can access both options on our halal investment platform here.
  2. If you are a Muslim business – fight tooth and nail to avoid riba as much as you can. It is possible if you really work at it. We are very sympathetic to your plight and doing all we can behind the scenes to support people who are working to bring viable solutions to the market.
  3. If you are an entrepreneur – try to solve this sharia-financing problem. It is a potentially massive market which is yet to be properly cracked. Try to solve this problem. Once you have put together a viable model and team – get in touch with us at IFG.VC. We’ll fund the best teams.
  4. If you are none of the above– don’t be quick to throw stones at people for doing haram. But also don’t be quick to celebrate business success based on conventional debt. It is a complicated, nuanced world out there.

We have asked the EG Group to comment on this article and will update it in light of their feedback.

23 Comments

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23 Comments. Leave new

  • Excellent article as usual. I really appreciate the points at the end as we are often too quick to jump on the bandwagon and just attack people in the limelight.

    Reply
  • Very good article brother. So is your total approach on Halal finance and investment.
    Would like see an article on halal real estate development finance if possible brother.

    Reply
  • Abid Shehzad Bhatti
    October 3, 2020 11:31 pm

    الحمد لله
    ‎جزاك الله خيراً
    Excellent article. I found it very interesting and informative.
    Very much appreciated.

    Reply
  • I disagree with the article justifying haram actions. Everyone knows riba is haram, young children know that. How can you say they didn’t know, when they started? By giving zakah doesn’t make haram money/profits halal. Where did you get that from? So if all drugdealers give 2.5% to charity their money is halal?

    We make excuses when there is no evidence to suggest otherwise. Here there is evidence and we know they borrow the money from conventional banks.

    Haram is haram and we must boycott it. You can’t halalify your money by funding darul ulooms and your local markaz.

    Reply
  • Mohammed Islam
    October 4, 2020 12:15 pm

    I completely Agree we should not Celebrate those who gain “success” via haram means…otherwise we should do the same for the plenty of “successful muslim” drug dealers in our local areas, lol.

    Furthermore regarding the matter of boycotting the following verse comes to mind:

    …… “Help you one another in Al‑Birr and At‑Taqwa (virtue, righteousness and piety); but do not help one another in sin and transgression. And fear Allah. Verily, Allah is Severe in punishment”
    [al-Maa’idah 5:2].

    Ibrahim wouldn’t shopping in Asda now be contrary to the above mentioned verse?

    Reply
    • Shopping in Asda ‘now’ would be haram? But not before, when it wasn’t owned by Muslims but still sold pork, alcohol, etc?

      Reply
      • Mohammed Islam
        October 5, 2020 11:14 am

        This verse refers to the BELIEVERS, lets not be shallow and put a kafir on the same pedestal as a believer.

        Reply
  • MashAllah you described the reality of this deal very well .What is contentious is that you expect a riba fuelled economy driven by profit motive to accommodate Islam . What Muslims need to do establish an alternative economy that means a political change in the Muslim world to implement Islam

    Reply
  • Why couldn’t they get investment from the middle east and other parts of the muslim world that have huge wealth. It will not be possible to have investment from the people of the uk to buy up these big companies. Surely, we should be persuading our wealthy brothers in the other countries to buy up companies like Asda as they are a real business and contribute to society.

    Reply
    • We need to work as an ummah and work together to benefit the muslims all over the world.

      Reply
    • Instead of buying up football clubs they should buy more retail companies that generate profit or lend money to islamic banks and make halal home purchasing affordable for more people

      Reply
      • Could we be making matters worse by buying up these companies and houses as the prices paid for them are not realistic and every time more debt is increasing and the spiral of debt gets worse. Maybe by renting and buy business people can afford in the long term we will all benefit

        Reply
  • Lots of people are missing the point of this article. The article is not celebrating their success. What it is saying is that the deal is “probably not” shariah compliant and work needs to be done to improve the situation.

    P.S. for those planning to boycott Asda, please call each and everyone you know in UK and check if their houses were bought with shariah compliant mortgage. If not make sure you do not enter their homes. Or read the article again and understand it’s gist!

    Reply
    • We need to differentiate Islam from this. This was a business deal done by brothers probably for personal reasons and happen to be muslim, but thier actions don’t reflect that of practising islam. It could be regarded as a change of management and by putting islam into this is I feel it is not the right thing to do. If the brothers where genuine practising brothers then we could justify using islam but I think they did not do this purchase for the worship of Allah and that’s our goal in life. Allah knows best.

      Reply
  • Could we be making matters worse by buying up these companies and houses as the prices paid for them are not realistic and every time more debt is increasing and the spiral of debt gets worse. Maybe by renting and buy business people can afford in the long term we will all benefit

    Reply
  • Muhammad KHAN
    October 6, 2020 8:55 am

    Topical and interesting if a person knows how to create wealth through properties ( mortgages) or businesses ( leveraging) but not doing it as it requires conventional financing and its not halal because of interests being involved what would that person do…
    In my opinion venture out to create a Halal Financial Institution that is what i am thinking of doing
    I had a trading business 15 years ago and i leveraged that to make more profit using banks money and then paying interests to bank from the profit as i presumed it was okay to give interests as long as you are not taking interests and eating but 10 years ago as knowledge was gained i found giving taking and even recording is haram and the leveraged profit that i was making was contaminated as soon as i would take out the interests for bank hence had to let go off the bank and let the business spiraled down the most difficult part financially was to let go of a mortgage of a beautiful mansion like house with swimming pool etc and start living in a rented property for last 8 years
    The irony of fate was such the equity proceed from the sale of the house after mortgage return was invested in business to last only 3 years and the business came to a grinding halt 5 years ago
    It appears as if i have lost business lost my house but thanks to Allah I am alive i have a family i have friends and i am strong enough to rebuild my business with investor equity financing no money involving interests and Allah is prospering the business Alhumdolillah and he has made me free of bank loans bank overdrafts bank mortgages bank credit cards etc
    I have full conviction that if Allah wants me to become worthwhile he will make me that if he sees mediocrity as best for me i am grateful to him for that what he did for me to get me out this interests game is incredible and i am ever so grateful to him for this nijat from riba
    I am all focussed on getting a platform to run financing in a halal manner
    Need to get hold of high networth individuals interested in making more than money ie money plus rewards from Allah
    If you need to reach me my email is mkhan@ khansfoods.com.au phone in Australia is +61416210706
    My background is i am a mechanical engineer with an MBA from Melbourne University and have had 15 years of experience in Energy and Steel before venturing into business in Australia Alhumdolillah

    Issa Bros story is similar to the Shahin family in South Australia where the patriarch Fred Shahin a palestian started with a service station and now owns 200 of them but in parallel he also had a tobacco wholesale retail business and i am sure he must have leveraged many times to grow and creat wealth and i am sure he didntlook for halal financing otherwise he would have refrained himself from tobacco business but he is the one who built one of Adelaides biggest mosque Al Khalil so i think its it good to study ASDA takeover for knowledge but what people do that is their prerogative yes if opportunity is their to guide of advise why not May Allah help all of us Ameen

    Reply
  • Brother Ibrahim Khan,

    Jzk for the informative article (The finance bit). From the article it looks like you are not a scholar. Matters of jurisprudence should only be touched by Muftis whom have deep knowledge regarding matters of deen. On the back of this article you are marketing your own products. This article is not based on what is right and wrong.

    Due to your inept premature knowledge you have just inadvertently informed people that they can conduct business in haraam “by saying if the products do not constitute the majority of the business and are likely under 5% of the total revenue of the business the profits from these sources can be purified by giving them away. What a load of nonsense!

    Regarding the matters of religion, it is incumbent upon you to refer to the trustworthy scholars who have deep knowledge about it. Allaah The Almighty Says (what means): {So ask the people of the message if you do not know.} [Quran 16:43]

    I advise you remove this article as you are misleading the Ummah.

    Reply
  • I cannot believe what I am reading in this article!!!! Pork and Alcoholic beverage revenue of any high street supermarket in UK would be more than 5% of the total revenue. this is not a real estate investment, it is an investment into the business/Asda.

    Reply
    • I’d be grateful if you could reference any sources on this that you have – would be great learning for us iA. If it is above 5% of course that would make the whole thing not compliant.

      Reply
  • Great article in explaining the transactions. One thing to point out is regarding sale of alcohol. I think the article would do well to highlight that Rasullulla SAW “cursed the one who sells, one who buys, even one who simply serves it to people” as easily found in Sahih hadeeths, so no excuse of giving to charity or giving up sales would solve this. The only solution is that the seller should be reminded to give up selling alcohol altogether, otherwise he/she is involved in a sinful practice. As a community, we should be mature enough to find balance between telling the truth as it is, while not attacking individuals. May Allah SWT guide us all.

    Reply

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