The fate of Australia’s leading fuel distributor Caltex is in the hands of a giant Canadian outfit, the Caltex management team … and the gods.

Just as Australian political sensitivity to fuel security is peaking, the prospect of a sale of all or part of Caltex, which includes a refinery and an import terminal, has ramifications well beyond a corporate play.

Four months ago, just ahead of his half-year results, Caltex boss Julian Segal announced his retirement. After a decade spent transforming Caltex from a refiner half-owned by Chevron to a fuels, infrastructure and convenience retail business, Segal paid his $50 to attend UNSW’s astronomy classes. He had plans to spend many hours on his passion, far away from the light-polluting cities with his small collection of telescopes, star-gazing and pon­dering the most difficult questions of all.

“It’s the essence of life,” he says excitedly. “Understanding the universe, understanding black holes, understanding stars. You are literally made of star material because whatever you see around you is stars that exploded, material that eventually coagulates together to create the planet.”

Since August, the stars have not quite aligned as expected. On October 11, a takeover bid for Caltex at $32 a share was lobbed onto the desk of chairman Steven Gregg by the Quebec-based Alimentation Couche-Tard. Rebuffed by the Caltex board as low-ball, on November 18 the bid was upped to $34.50 a share, valuing Caltex at about $8.6bn. While Gregg again turned down the offer — in a 5am call to Couche-Tard CEO Brian Hannasch — the board decided to open the kimono a little. It invited Couche-Tard to do some limited due diligence in the expectation of a bid that is upped once more. Gregg and Segal are still waiting.

“Just changed my mind,” jokes Segal about his retirement. “It’s actually very gratifying for me to see where we are. I certainly don’t have time to think about my retirement. I’m focused on running the business, and I’m running it with a strong hand as usual.”

As of Monday morning, Caltex is very much in play. If Couche-Tard does return Caltex investors have some thinking to do. Segal agrees that the Canadians, who he respects very much as operators, were opportunistic in their timing with Caltex mid-year delivering trough-cycle earnings reflecting a share price between 12-month and three-year lows.

In the meantime, Segal and what he describes as the best management team he has worked with in 30 years have been responding to shareholder pressure to unlock capital. That includes considerable franking credits.

Most significant is the proposed IPO of 49 per cent of Caltex’s 500 core convenience retail outlets. “A big difference was Matt Halliday, our new CFO coming on board. He joined us in April and he immediately put his mind to how we can unlock value. The IPO, the way we announced it is a very elegant solution, effective solution to unlocking franking credits, as well as the announcement we made on the sale of 25 higher and better use sites, that’s $136m; that’s tranche number one and tranche two to follow in January.”

These latest moves vindicate the lift in share price according to Segal and his chairman, who argue that the $34.50 price is a measly takeover premium of 15.8 per cent. Any offer price should be compared with the price that Caltex shares jumped to when the IPO was announced on November 25.

“The market reacted very positively to that, obviously because that unlocks a lot of franking credits that we can return back to our shareholders. The share price went up on the day by 7 per cent and, in my view, if we had not put out an announcement and had not had the Couche-Tard offer on the Tuesday, the following day, the share price would have gone even higher. So you can look at $29.79 the closing price on Monday, ­November 25, as an undisturbed price.”

Another bone of contention has been the value Couche-Tard attributes to the franking credits, more than twice that of Caltex management. Couche-Tard assumes a zero tax rate for investors, something Segal rightly points out is unrealistic.

The task for Segal and his CFO is to convince investors that the strategy to unlock existing value and indeed to grow new value can beat any scenario presented by the Canadians. On Thursday Segal marched analysts through another mind-blowing investor day. Caltex has a reputation for leaving sore heads as analysts and the media wrestle with the impact of refiner margins for Caltex’s Lytton refinery, retail margins, fuel prices in jet, diesel, petrol, the critical Ampol trading hub in Singapore and then the retail market, both in Australia and the more recent higher growth acquisitions of Gull in New Zealand and in the Philippines business.

Analyst feedback on Halliday, who arrived from Rio Tinto in April, seems very positive, both in his handling of analyst questions around the disappointing half- yearly results in August, and last week’s pitch to investors on shareholder value.

Over in the camp of the big Canadian, about eight times the size of its target, the interest in Caltex lies in its convenience retail and the potential for Asian expansion. On the site tour at the new Caltex Metro at North Ryde on Thursday, Julian Segal stands tall in his bright-yellow, high-viz jacket, in front of a rack of equally yellow perfectly ripe bananas. The company is targeting an $85m uplift in EBIT for convenience retail by 2024. Analysts certainly noted the transformation, the foot traffic in non-peak hours and staff efficiency. That said, it is no secret that Segal has been challenged in delivering his vision for convenience retail — Caltex dropped a previous uplift guidance — or that Caltex itself admires the retail operating skills of Couche-Tard but Segal is adamant that with Woolworth’s backing, the $85m uplift is achievable.

“Have a look at this shop, have a look at the business of this site! We know that typically in a Caltex traditional site, 80 per cent of the profit comes from fuel, 20 per cent from the shop. In comparable sites overseas, the ratio is just the other way around. And that is not because they are selling less fuel: they are selling much more shop and I’m confident we can achieve that as well.” It is worth noting that while growth in liquid fuels is slowing in Australia any reports on the death of petrol are highly exaggerated, a point endorsed last week by Moodys.

As investors weigh up any new bid, they will be just as focused on the fuels and infrastructure business, run by Louise Warner who started the Singapore Ampol trading hub. A further $70m in EBIT uplift is targeted. Warner spoke of strong growth in both New Zealand and the Philippines, the opening of a new trading hub in Houston and an international storage facility which will leverage Caltex’s deal-making in fuel procurement, shipping and trading.

It is Caltex’s ownership of the Lytton refinery in Queensland that could radically change the structure of any third bid by Couche-Tard. Among the analysts on tour testing the Boost Juice corner of the Metro was Jefferies analyst Michael Simotas.

“We just do not know if Couche-Tard wants the infrastructure or the refinery — it doesn’t have any refining operations in other markets,” he explains. At a time of rising public and political concern on fuel security in Australia, Simotas says it is both the refinery and (largely overlooked so far) the import terminal at Kurnell which will be on government radars. Australia produces less than 40 per cent of its ­refined product needs. A Credit Suisse note this week described an M&A story with some distance to run and “all options being left open with respect to full or partial ­divestment, monetisation of property assets and taking on additional financial leverage”.

Could Couche-Tard buy the lot and keep the refinery, non-core for the company, but well run as it is? Or instead on-sell the refinery? Given the likely FIRB and political interest, the final buyer might have to be in place as part of the approval process.

On the other hand, tax considerations may be one deterrent to splitting the Caltex business.

As to the board’s decision to open that kimono and wait for a third bid, Segal responds. “Our job is to deliver the highest possible value to shareholders. We can deliver significant value and the board backs me on that. The point is that we need to make sure that we don’t miss any opportunity to deliver value to shareholder in the shortest possible time. Given that Couche-Tard is a reputable company, we respect them very much, it is fair to give them the opportunity to put a better price on the table that might be compelling, ­enabling us to give better return to the shareholders. I think it is only fair to our shareholders.”

Most analysts expect a third bid from the Quebecker night owl. Chair Steven Gregg has a job to do, but as a former global head of investment banking at ABN AMRO, a McKinsey partner and having sat on the board of Tabcorp since 2012, he should be well armed. Couche-Tard has been savvy with its timing not just on price, but also with Caltex leadership in play. Surely Gregg has to resolve the takeover question ahead of any board decision on a new CEO.

“I know there’s a shortlist of ­extremely well-positioned candidates, including an internal candidate, Louise Warner,” says Segal. “I think in the normal course of events, probably over the next six months I should be handing over the reins.”

Gregg told investors this week: “Julian has been a stellar servant of your company.” Star gazing is on hold for now.

Extracted from AFR