Six months after it was floundering in the share market at $20 a share, fuel refiner, distributor and convenience store operator Caltex Australia has attracted the interest of multiple bidders, with the stock trading 75 per cent higher at $35.33.
Major shareholders BlackRock, AustralianSuper, Airlie Funds Management and Vanguard could well benefit handsomely from a bidding duel which was started by Canadian convenience store group, Alimentation Couche-Tard (ACT).
ACT made its first confidential move on October 11 with a non-binding indicative proposal to buy 100 per cent of Caltex by way of scheme of arrangement at a cash price of $32 a share in Caltex, inclusive of a fully franked special dividend. This was a 28 per cent premium to the closing price the day before.
On November 18, ACT came back with a revised confidential non-binding indicative proposal at a cash price of $34.50 a share (inclusive of fully franked special dividend).
Caltex confirmed on Wednesday it “has had approaches from a number of parties, including EG Group, who have indicated that they are potentially interested in making a proposal to acquire Caltex or some of its assets”.
In other words, there is a potential break-up of the company on the horizon.
Much was made of the EG Group approach, but this company would surely have serious problems with the Australian Competition and Consumer Commission if it went ahead with a bid.
Two years ago, the ACCC blocked BP acquiring a network of retail service station sites owned by Woolworths. Instead, EG acquired the Woolworths service station sites.
ACCC chairman Rod Sims is unlikely to discard the concerns he had in December 2017 about loss of competition from concentration of ownership of fuel distribution. BP has a 20 per cent market share in wholesale petrol distribution, while Caltex has a wholesale market share of 34 per cent.
Caltex has responded to the ACT offer and its request for due-diligence access with an invitation for ACT to attend a “business presentation” by Caltex management.
This has caused protracted negotiations over the terms of this engagement between the two companies. It is believed Caltex and ACT are negotiating the details of a non-disclosure agreement and the length of time for a standstill agreement that would stop ACT talking to other parties.
Caltex started this takeover battle in a weak position because of uncertainty over its management succession and its poor short-term performance. Another issue for the target company is the sudden decision by Chevron to end its licensing agreement for the use of the Caltex name.
After ACT bid against itself and lifted its offer to $34.50, Caltex said it would spend $165 million over three years rebranding its business to Ampol, an iconic name that was built up over decades. This could prompt ACT to rethink the value of its offer.
The ACT offer of $34.50 a share compares well to the most recent transactions in the sector. When Woolworths sold its petrol retailing business to EG Group the price was at an enterprise value which was 7.3 times earnings before interest, tax, depreciation and amortisation.
When Chevron bought Puma Energy’s commercial and retail fuels business it paid $425 million, or an enterprise value which was 7.7 to 8.8 times EBITDA.
Caltex is concerned the value inherent in its business from a sums of the parts analysis is not reflected in the ACT proposal. It is possible it could achieve this valuation by taking advantage of the takeover auction process to break itself up and allowing shareholders to separately capture the higher value in the convenience and petrol retailing operations.