What Next For the BP/Woolworths Fuel Deal?

Australia | Dec 15 2017

The ACCC has opposed BP's proposed acquisition of the Woolworths petrol business. Brokers suggest a capital return for Woolworths is now less likely and Caltex is less likely to lose -$150m in earnings.

-Decision reflects the greater influence of the Woolworths sites nationally than occurred with the Milemaker acquisition
-Setback raises questions regarding the funding of the Woolworths store refurbishment
-Woolworths supermarkets return to growth, irrespective of the ownership of the fuel outlets

 

By Eva Brocklehurst

Australia's competition regulator, the ACCC, has thrown a spanner in the works for BP's acquisition of the Woolworths ((WOW)) service stations business. The ACCC has stated it will oppose the acquisition on the basis it would substantially lessen competition in the retail supply of fuel. Notably, the ACCC said the underlying concerns would not be addressed by the divestments proposed by BP.

Ord Minnett had assumed the transaction would occur, but with a significant number of divestments. This was based on the fact that the ACCC allowed Caltex ((CTX)), which is generally a higher-price competitor that leads pricing cycles upwards, to acquire Milemaker, which typically contributes downward pressure to prices.

It appears the greater influence nationally from the Woolworths petrol business versus Milemaker's concentration in Melbourne, along with a large overlap between the BP and Woolworths sites, are factors that weighed more significantly on this decision than many had envisaged.

Brokers now canvass the options available for the fuel business going forward. BP and Woolworths are expected to challenge the decision and Woolworths may seek an alternative buyer, or it might also decide to retain the business.

Ord Minnett suggests, given Foreign Investment Review Board (FIRB) approval is required, and that often requires ACCC approval, forcing the the issue to the Federal Court is unlikely. BP and Woolworths would need to consider whether they were willing to invest further time and money in the process.

Morgans always believed there would be issues with the deal, given the amount of overlapping sites, as well as the fact BP is a premium-price fuel retailer compared to Woolworths being a more discount-oriented operator. Moreover, the broker believes any future deal with an existing major fuel retailer is likely to face similar ACCC concerns.

Caltex

In the absence of a sale of the Woolworths fuel business the exclusive contract for wholesale supply from Caltex to these outlets will probably continue. Citi suggests Caltex may now supply Woolworths for at least a further 12 months. In addition, the cessation of the BP-Woolworths alliance may also lower competition for the Caltex Foodary roll out.

While Caltex has already offset the potential contract loss through acquisitions and cost reductions, Citi continues to believe the market under-appreciates the opportunity to further offset lost sales via the acquisition of BP re-sellers, if the deal is ultimately successful, or by maintaining wholesale supply if it fails.


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