Caltex is edging closer to a deal with potential Canadian-based bidder Couche-Tard, which is considering signing a confidentiality agreement for limited due diligence on the fuels retailer.

It is understood a confidentiality agreement could be signed by the end of the week.

The agreement would also require Couche-Tard to agree not to increase its stake in the company, believed to be about 2 per cent.

The potential deal value is $8.6bn.

Caltex chairman Stephen Gregg this month rejected Couche-Tard’s proposal to bid $34.50 a share for Caltex, saying it undervalued the company, but he left the door open with limited due diligence.

Negotiations between the two are continuing, with suggestions a deal is close.

Couche-Tard is not obliged to lift its offer for Caltex at this stage in order to proceed — it only needs to agree to a standstill and confidentiality agreement.

Caltex’s board claims the offer of $34.50 a share represented a premium of 15 per cent, against the normal 30 per cent premium in takeover bids.

The higher premium would put the price at $38-plus a share.

Before Couche-Tard’s offer, the Caltex board had previously rejected a proposal at $32 a share.

The developments come after rival Viva Energy last week issued a downbeat earnings forecast, which sent analysts downgrading their expectations for the year’s earnings. BAML cut its estimate for Viva’s earnings before interest tax, depreciation and amortisation by 10 per cent, from $707m to $630m.

The downgrade, based on weak retail margins, also cast doubt on the Caltex board’s valuation at a time when the company is also looking for a new chief executive to replace Julian Segal, who will step down in the new year.

The internal favourite is Louise Warner, who runs the fuel and infrastructure business. Given the potential takeover activity, her candidacy has gained ground.

Couche-Tard is yet to comment publicly on the Caltex offer.

The Caltex board is under pressure from shareholders, including Merlon Capital Partners and Airlie Funds Management, to negotiate a deal with Couche-Tard.

The Canadian firm has rejected speculation of a sale of the non-retail assets to an infrastructure fund such as Brookfield. With fund manager books closing for the year, there is an obvious short-term appeal in at least the chance of a deal to keep the share price near the deal level.

Caltex’s stock closed on Monday at $34.13, below the potential deal price but well above its low in August of $24.

Given the uncertainty over the company amid a search for a new chief executive and weak retail margins, a potential deal supports the stock price.

Extracted from The Australian