Caltex could suffer a weakened credit profile if Couche-Tard’s $8.6bn takeover bid proceeds due to the Canadian company’s weaker financial position, ratings agency S&P Global said.
The Australian fuels retailer was locked in a second day of talks with its suitor on Friday after the two sides agreed a period of limited due diligence.
Caltex hopes the move will keep the door ajar for the bidder to hike its $34.50 a share offer – the second tabled after an earlier $32 a share bid was rejected – while Couche-Tard hopes to gain a deeper understanding of Caltex’s strategy and earnings outlook through a series of briefings with management.
However, Caltex faces a weakening profile should an indicative bid ultimately succeed, according to S&P.
“The credit impact will ultimately depend on Couche-Tard’s corporate and funding strategy, as well as our view of Caltex’s strategic importance as an operating subsidiary of the Couche-Tard group,” S&P said.
“The negative outlook on Caltex reflects our view that weak operating conditions that are affecting the company’s convenience retail and refining earnings will persist over the next 12-24 months. This will test the effectiveness of Caltex’s capital management framework.”
Caltex holds a BBB+ rating, while Couche-Tard is ranked BBB. Caltex suffered a fall in its fourth-quarter refining margin on rising oil premiums and freight costs but retained its annual earnings guidance.
Britain’s EG Group entered the takeover fray last week after outlining its interest in parts of the business.
However, the owner of Woolworths’ petrol business faces greater risks in getting a deal over the line, JPMorgan has said, with potential competition concerns seen as a significant hurdle.
EG is already in talks with the Australian Competition & Consumer Commission to pave the way for a potential deal.
Either way, Caltex still retains strategic appeal given the ability of its successful fuels and infrastructure unit tapping into a fuel glut in Asia.
One option could be to replicate the 2003 Shell Coles alliance where Coles ran the retail operations while Shell supplied fuel and owned the sites.
“While Caltex convenience retail is getting better under new management, such a structure could de-risk a division where performance has been mixed,” JPMorgan analyst Shaun Cousins said. “Caltex retains strategic appeal. The convenience retail opportunity is significant, the short fuel position and Ampol opportunity attractive given the regional long position.”
Caltex shares fell 2 per cent, or 71c, to close at $34.91 on Friday.
Extracted from The Australian