Caltex Australia has revealed it could lose its 3.5 billion litres per year contract to supply petrol and diesel to Woolworths unless it is successful in beating off rivals to acquire the supermarket’s circa $1.6 billion fuels retailing network.

Giving formal confirmation on Tuesday that it had made a bid for the Woolworths petrol station network, Caltex noted its wholesale supply contract “is linked to Woolworths’ continued ownership of the business”.

The disclosure surprised some in the market, who had understood that the 10-year contract, which is thought still to have about eight years to run, wouldn’t necessarily be affected should Woolworths sell the business to one of Caltex’s rivals.

Caltex shares shed 4.2 per cent to close at $32.87, a four-week low.

The news comes just as rival BP is understood to have edged in front of Caltex in its bid to buy the business. A third bidder, commodities trader Vitol, which controls the Viva Energy business that owns the Shell branded stations, is thought to be some way behind in the bidding race and in any case would be expected to face even more significant competition issues than the other two.

Caltex said it had made “a conditional and confidential proposal to Woolworths to acquire its fuel business and continue the successful fuel alliance”. The supermarket owner confirmed late last month it was evaluating proposals for the business.

Caltex chairman Greig Gailey made clear last week that the company would be particularly disciplined in its approach to any acquisitions in its core market given expectations of a shrinking fuels market due to improved fuel efficiency and the introduction of electric vehicles.

The company reiterated in its Tuesday statement that it would “maintain financial discipline” in the bid process. It “remains focused on the creation of top quartile total shareholder returns, driven by profitable, capital efficient growth”.

Australian Competition and Consumer Commission chairman Rod Sims has let it be known he will be scrutinising any deal involving an existing petrol retailer for its impact on what he already sees as a fairly concentrated market.

The acquisition of Woolworth’s petrol business could lift Caltex’s annual earnings per share by 3.4 per cent if it secured the deal for 10.5 times earnings, Macquarie’s equities research team has calculated. Citigroup has put the potential earnings uplift at 5-8 per cent, assuming a deal price of $1.3 billion-$1.5 billion.

However Caltex has other growth avenues under consideration, with chief executive Julian Segal having outlined a plan to revitalise the company’s convenience retailing offer.

Any transaction “remains uncertain and is expected to take time to complete,” Caltex said, adding it would update the market if there were any material changes to its wholesale supply arrangements with Woolworths.

Extracted from Australian Financial Review.