Woolworths will decide by the end of October whether to press ahead with a $1.6 billion float of its fuel business amid fears decade-high petrol prices and a stoush between Coles and Viva Energy will dent potential investor demand.

After offering the fuels business for sale more than two years ago and clinching a $1.8 billion sale with BP in December 2016 – only to see it blocked by the competition regulator this year – Woolworths chief executive Brad Banducci was keen to see a sale or demerger wrapped up before Christmas.

However, with barely eight weeks before the markets start winding down for the holiday period and as trading conditions deteriorate, investors believe Woolworths is increasingly likely to opt for a trade sale rather than an initial public offering.

“The market is not conducive to IPOs of any style and there’s not massive demand for petrol retailers,” said one fund manager, citing Viva Energy’s share price.

Investors fear historically high petrol prices combined with Coles’ ongoing fight with Viva Energy over the terms of its supply deal – which has saddled Coles with Australia’s highest petrol prices and led to a one-third slump in volumes in two years- will reduce the appeal of a Woolworths Petrol IPO.

According to the Australian Institute of Petroleum the national average price of unleaded petrol rose 1.8¢ to 159.3¢ a litre last week, the highest level since July 2008.

While demand for petrol is considered relatively inelastic, Coles blamed high pump prices and its supply deal with Viva for another sharp drop in  fuel volumes during the September quarter.

Woolworths pursuing options

A Woolworths spokesman declined to comment on recent trading ahead of the release of Woolworths’ September quarter sales next week.

However he confirmed that an announcement on the future of the petrol business was “not too far away”.

Woolworths has been pursuing options for petrol since June, when BP walked away from its $1.8 billion deal to buy the business after failing to overcome Australian Competition and Consumer Commission concerns.

Woolworths told investors at its full-year results in August it was looking at both a trade sale and an initial public offering and had received strong interest from trade players, but there was also “strong momentum” in the IPO process and it hoped to make a decision before Christmas.

The appointment in August of veteran food and energy industry executive Peter Hearl as chairman of Woolworths Petrol suggested the retailer was erring in favour of an IPO.

Woolworths also applied to change the petrol business from a proprietary company to a public company the same month.

However, it is understood that Woolworths, which is being advised by UBS and Morgan Stanley, has not yet appointed retail brokers to help sell the initial public offering, which suggests it may have gone cold on a float.

Demerger plan ‘makes sense’

Contango Asset Management chief investment officer George Babouras said the sale or demerger of the fuel retailing operations made sense for Woolworths, as did Coles’ demerger from Wesfarmers.

“It makes a lot of sense for them to divest non-core businesses,” Mr Babouras said.

“It’s very clear vertical integration is not the way businesses are moving forward – the template is for a more streamlined and simplified consumer  staple that will be defensive for  many investors.

“It’s a good strategy and I do think a lot of funds are very much looking for true consumer staples (stocks).”

As reported in Street Talk last month, two British-based companies, fuel, healthcare and technology company DCC and fuel and convenience retailer EG Group have been taking a close look at the Woolworths business.

Woolworths’ fuel business has 534 sites and sells 3.6 billion litres of fuel a year. Earnings rose 7.1 per cent to $168 million in 2018 as sales rose 3.1 per cent to $4.8 billion.

Extracted from AFR