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ACCC Fuels Acquisition Debate For Caltex

Australia | Mar 17 2017

The ACCC has raised some issues for petrol distributor/retailer, Caltex regarding the Milemaker acquisition. Brokers also contemplate what this means for the Woolworths/BP transaction.

-If Caltex cannot assuage ACCC concerns UBS envisages a -1.5% impact on EPS
-Implications for the Woolworths/BP transaction are considered more significant
-If both transactions end up being blocked, Deutsche Bank suspects a net positive for Caltex


By Eva Brocklehurst

Australia's competition overlord, the Australian Competition and Consumer Commission, has observers of petrol distributor and retailer Caltex Australia ((CTX)) in a quandary. Not only is the company's acquisition of retail chain Milemaker in the regulator's sights but there is also the implications for the other Caltex-supplied business which is up for grabs; the sale of the Woolworths ((WOW)) branded fuel outlets to the UK's BP.

The ACCC has released an initial statement expressing concerns that the proposed acquisition of 46 service stations in Victoria from Milemaker will substantially lessen competition. Further submissions have been invited from interested parties by March 30, with a final decision to be announced on April 20.

Milemaker currently sells Caltex-branded petrol and sets its own price for the fuel sold. The ACCC estimates that Caltex currently controls retail fuel prices in 7% of Melbourne metro areas and the acquisition is forecast to increase this to 11%. Caltex is confident it can address the issues.

In determining competition in the Melbourne metro area, the ACCC has divided Caltex sites into two categories: those where the company can set the retail fuel price, 59 sites; and those Caltex-branded sites, 35, where it does not set the retail fuel price.

UBS estimates the acquisition would add around $12m to Caltex earnings in 2018. While forecasts include the acquisition, if Caltex is unsuccessful in meeting the ACCC concerns the broker believes there would be a negative -1.5% impact on earnings per share in 2018.

The ACCC has indicated that Milemaker has average prices that are generally below Caltex. Moreover, Milemaker is quick to discount and slow to respond to large price increases during the retail petrol cycle. An acquisition by Caltex could therefore lead Melbourne motorists to pay more for their fuel.

On this basis, Macquarie does not discount the ACCC concerns but does note that, in the statement, the issue has been classified as one that “may” raise concern rather than being an issue “of concern”. Therefore, it is likely in the broker's opinion that the sites already supplied by Caltex should be able to appease the ACCC concerns about pricing policy.

Implications For Woolworths/BP

Of greater significance, brokers believe, is implication for the BP transaction surrounding Woolworths fuel sites. The competitive impact of this is likely to be far broader and of greater concern to the regulator. Macquarie highlights the thoroughness by which the ACCC assessed the competitive impact of acquiring Milemaker, and suspects this could lead to significant conditions being imposed on the BP/Woolworths transaction as well as possible store divestments.

UBS highlights the challenges ahead for BP in gaining approval for its proposed acquisition of the Woolworths fuel division and 527 sites. The broker estimates a -$100m earnings impact on Caltex from the potential loss of the Woolworths fuel volumes in 2018. BP is calculated to have approximately 37% market share in Australia, post its acquisition.

Some site divestments are anticipated, but the nub of the Milemaker announcement suggests to the broker that further areas of concern relate to whether the ACCC defines the Woolworths fuel business as a "vigorous and effective competitor" to BP, and how BP addresses these issues. The ACCC has confirmed it has received submissions from both BP and Woolworths on BP's $1.78bn proposal.

If the final decision is unchanged, Deutsche Bank believes such a scenario could ultimately end up being a net positive for Caltex. If the ACCC were to prevent an increase in its market share in Melbourne to 11% from 7%, it raises the risk that the BP acquisition of Woolworths sites, which would raise that company's national market share to 12% from 5%, could be blocked.

Under such a scenario the loss of Milemaker earnings would be more than offset by the retention of Caltex earnings from wholesale fuel sales to Woolworths sites, in the broker's opinion.

Credit Suisse agrees, if the ACCC has issues with the Milemaker deal in Melbourne, the acquisition by a premium brand such as BP of a well-known discounter such as Woolworths must surely, at the very least, face similar scrutiny. Nevertheless, the broker believes the reaction in the Caltex share price is strange.

Credit Suisse is baffled by both the emergence of concern that the Caltex earnings are potentially at risk from not consummating the Milemaker acquisition and an inevitable conclusion that, if the ACCC were to block Caltex buying Milemaker, it would be very hard to allow the BP/Woolworths transaction.

Credit Suisse expects, on the balance of probabilities, that both transactions will go ahead. The broker continues to believe the BP is paying a high multiple for Woolworths fuel but, if more details were provided on the synergies targeted, perhaps it would avoid the conclusion that some of the synergies are coming from plans to institute higher prices at Woolworths sites.

On FNArena's database, there are five Buy ratings, one Hold (Morgan Stanley, yet to update on the statement) and one Sell (Ord Minnett, yet to update on the statement). The consensus target is $33.78, signalling 19.2% upside to the last share price, and targets range from $27.50 (Ord Minnett) to $39.70 (Credit Suisse). The dividend yield on 2017 and 2018 forecasts is 4.0% and 4.2% respectively.

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