It is too early for competition chief Rod Sims to say how he will ultimately rule on oil giant BP’s $1.8 billion acquisition of Woolworths’ petrol station network. One thing he does like about the deal announced just after Christmas is that the Australian Competition and Consumer Commission (ACCC) will have almost a year to examine what is an incredibly complex transaction.
Whether he likes anything else about a tie-up that will reduce the number of players in the highly-politicised petrol retailing space remains to be seen.
Sims quite rightly says he should not be sending out any signals when the ACCC has not received a submission yet. But he can give a flavour of how the competition watchdog will approach its assessment of the tie-up.
Sims says the ACCC will look at the deal under three headings.
The bottom line will be the impact the deal has on petrol prices. BP and Woolworths must ultimately convince Sims that overall prices will not increase as the result of lessening competition.
“We will look at the chain on chain competition. You have one less player in the market place setting the price. We assume BP will now set the price at Woolworths’ service stations,” Sims says in his first public comments on petrol since the deal was announced on December 28.
Second, he says the ACCC will examine whether there are any “local” issues. This means looking at particular suburbs where there are potential competition issues because there are existing BP and Woolworths services stations in close proximity. Deutsche Bank says it expects the ACCC to look at the deal on a site by site basis, with sites to be divested where there is geographical overlap.
BP and Woolworths have not said it publicly, but they assume a handful of sites will have to be sold to address this issue.
Sims says the third heading will cover “any other aspects”. This includes the other layers of what is a complicated deal, such as the decision to jointly fund the 4¢ per litre fuel discount for the next decade and the impact the tie-up will have on both parties’ loyalty schemes.
“The good news is they are allowing a good time for our review. They understand the seriousness of it. We will be looking at whether this affects fuel prices for consumers, that is the bottom line here,” Sims told this column.
Safe to assume scrutiny
Sims rejects suggestions the ACCC will be looking at petrol competition more closely than anything else. Supermarkets believe they have been unfairly scrutinised by the competition watchdog in the past because of the public attention they receive and fuel is no exception.
It is safe to assume the ACCC will heavily scrutinise the deal though, given it is the biggest shake-up to the important petrol retailing market in decades. BP will be the market leader with about 800 sites all up when the deal is completed, leaving Caltex with about 700 and Coles with 450. Estimates vary but Woolworths combined are expected to have around 37 per cent market share.
Sims said in an interview with The Australian Financial Review last year he would prefer a new player to enter the market and he has questioned petrol retailers’ high gross margins. In 2013, Sims ended a fuel discount war between Woolworths and Coles by capping the discount on petrol vouchers at 4¢ per litre.
BP and Woolworths have agreed to jointly fund the 4¢ discount for at least another decade. However, JP Morgan analysts argue the ACCC’s voluntary undertaking around shopper dockets potentially threatens the co-funding arrangement. “Given the importance of the fuel redemption offer to both Woolworths, as an offer to its supermarket customers, and BP, as it drives over half the volumes, we suggest finding a solution with the ACCC is necessary,” JP Morgan says.
FIRB unlikely to be an issue
The ACCC expects to receive the submission from BP and Woolworths in late January or early February that will get the ball rolling on a public review. The deal also needs Foreign Investment Review Board (FIRB) approval, which should not be a problem given BP has interests in Australia. The completion date is not until January 2, 2018.
BP pipped rival Caltex in the auction of Woolworths’ 527 fuel sites, partly because the supermarket giant’s boss Brad Banducci believed the company better understood his convenience strategy. BP has similar partnerships with Marks & Spencer in the United Kingdom and REWE in Germany.
It is understood there was not a lot of difference in the final price on the table, but the negotiations hinged on finding common grounds on four separate contracts which also included loyalty programs and funding the 4¢ per litre fuel discount.
The $1.8 billion price tag values the business at 15 times earnings, which highlights the high prices fuel companies are willing to pay for convenience store networks.
The market had factored in the likelihood of BP securing the deal. Caltex shares fell around 20 per cent between mid-October and mid-November and are now trading around $30.46. Some analysts believe the stock has been oversold. Citi says Caltex does not need Woolworths for growth and it may still be able to acquire some sites that the ACCC does not allow BP to own. It may also be able to supply volumes to some Woolworths sites, which BP cannot do with its existing infrastructure or wholesale supply agreements.
Caltex has its own plans
Caltex boss Julian Segal was dismissive of the BP deal last week, insinuating his company had dodged a bullet by not overpaying for the assets in a market where there were declining fuel redemption volumes, “restrictive commercial terms” around fuel discounting and given the fact Woolworths’ network is leased rather than owned. Technology and consumer trends do mean the obsession with shopper docket fuel discounts is not as high as it was a few years ago.
Segal is still pushing ahead with his plans for a convenience store strategy, which will become pivotal to the company’s future in coming decades as the arrival of electric and driverless cars change the relevance of petrol station networks. It is believed Caltex is preparing to announce its strategic partner for its convenience store food offerings in around three to four weeks.
Segal has long had a vision of a national network of a new type of convenience store offering everything from fresh food, coffee and dry-cleaning that will rival anything on offer in Europe, the United States or Japan. Technology will play a central role in this vision, with customers using a Caltex app to pre-order something for dinner or have a parcel waiting for them as they drive into the site.
One challenge now is he will have a formidable new competitor in the form of the new “Metro at BP” format that BP and Woolworths are rolling out. Everyone wants a bigger slice of the convenience store market and competition will only increase in that area.
Extracted from Australian Financial Review.