Woolworths is expected to return $1.7 billion from the sale of its fuel retailing business through an off-market share buy-back to minimise earnings dilution and maximise the distribution of franking credits.
When Woolworths originally unveiled plans to sell the $4.7 billion fuel business in 2016, the proceeds were to have been split between funding Woolworths’ ambitious store refurbishment program, reducing debt and capital management.
It’s understood Woolworths now plans to return to shareholders most of the $1.72 billion it is set to receive from British-based fuel and convenience retailer EG Group in early calendar 2019, assuming the deal is approved by the Foreign Investment Review Board.
“This is shareholders’ money, let’s get it back to them,” one source said on Monday.
The renewed focus on capital management reflects the improvement in Woolworths’ fortunes since 2016.
Woolworths’ market value had fallen $20 billion in two years and its balance sheet was under pressure following a 29 per cent fall in earnings after the retailer invested more than $1 billion into prices and service to regain lost share in supermarkets.
Ratings agencies had downgraded Woolworths’ credit rating and the retailer was considering underwriting its dividend reinvestment program to preserve cash.
Healthier balance sheet
By the time the $1.78 billion sale of the fuel business to BP fell through in December 2017 Woolworths’ balance sheet was in much better shape, buoyed by cashflows from supermarkets.
Woolworths had also decided to scale back the number of refurbishments from about 120 a year to 80 and no longer needed the cash from divesting petrol to fund the refurb program.
Woolworths Petrol earned $168 million in 2018, or about $230 million excluding fuel discounts. According to JP Morgan analyst Shaun Cousins the petrol sale will dilute earnings per share by 7.4 per cent in 2020 and by 8.1 per cent in 2021 in the absence of capital management.
If Woolworths buys back $1.7 billion of shares at $28 a share, EPS dilution would be 3 per cent in 2020 and 3.8 per cent in 2021. A $1.7 billion share buy-back at $30 a share would be 3.4 per cent dilutive in 2020 and 4.1 per cent dilutive in 2021.
Citigroup estimated that an on-market share buy-back would be about 2 per cent earnings per share accretive.
However, an off-market share buy-back would be more tax efficient than a fully-franked special dividend and would enable Woolworths to distribute some of the $2.6 billion in franking credits on its balance sheet.
Accumulated tax losses from the Masters disasters will also help Woolworths minimise capital gains tax on the sale, as the petrol business was in the books at about $800 million.
Respectable sale price
Analysts welcomed the fuel deal, saying the $1.72 billion sale price was respectable compared with the $1.78 billion deal with BP, which was prepared to pay a premium because it would have enjoyed significant synergy benefits.
Mr Cousins also said Woolworths’ agreement to continue to supply the 530-odd petrol stations and convenience stores would help the retailer retain volumes with suppliers and its own private label product, including ready to eat meals.
“By locking in food supply, coupled with the long-term food supply contract for the Caltex petrol station network, it provides scale to the wholesale business it is re-entering after an absence for almost 15 years,” Mr Cousins said.
The divestment further reflects Woolworths’ focus on its core food business and investors expect Woolworths to now turn its sights to the other portfolio businesses – BIG W and ALH – and possibly even look at selling or floating Endeavour Drinks, as flagged recently in Street Talk.
Woolworths has refused to rule out a sale or IPO of ALH and Endeavour Drinks, telling Street Talk last month: “Our focus right now is the sale or IPO of the Woolworths Petrol business. We continually monitor options for all our portfolio businesses, but right now when it comes to liquor and ALH it’s business as usual.”
Extracted from AFR