It’s not surprising that $5 billion petrol station giant Viva Energy has regularly been mentioned in dispatches on Thursday’s $2.2 billion float of Mexican fast-food chain Guzman y Gomez. After all, the Guzman y Gomez float is the biggest since Viva hit the ASX boards in 2018 in a $2.65 billion deal.
But what’s less well known is that Viva is a more direct beneficiary of Guzman y Gomez’s success through an eight-year-old deal that it didn’t even do.
In April last year, Viva bought a business called OTR for $1.15 billion from Peregrine Corporation, the biggest private company in South Australia backed by the Shahin family.
The deal gave Viva a collection of 174 petrol and convenience stores, plus 31 non-fuel stores, as part of its broader ambition to build a network of 1000 stores around the country.
The OTR business included 92 quick service restaurants (73 integrated into petrol stations, and 19 stand-alone) from a range of brands including Subway, Krispy Kreme, Hungry Jacks and – you guessed it – Guzman y Gomez.
But that doesn’t tell the whole story of the links between the two companies.
Buried deep in the bowels of the Guzman y Gomez prospectus – page 209, for those playing at home – is a reference to Mehico Pty Ltd.
This piqued the interest of Stewart Oldfield, a former journalist with The Australian Financial Review, who now runs a highly respected consulting firm for institutional investors called Field Research.
It didn’t take long to discover that Mehico Pty Ltd is now a wholly owned subsidiary of Viva Energy, following the completion of the OTR deal.
But Mehico Pty Ltd isn’t just a Guzman y Gomez franchisee. What the prospectus reveals (albeit in the “additional notes” section) is that Viva holds the master franchisee agreement for South Australia, under a deal struck by the Shahin family way back in December 2016.
It’s an important role.
As the master franchisee for South Australia – and Viva has since confirmed that its territory also extends into surrounding parts of Western Australia, the Northern Territory and Victoria – it is Viva that has the right to sell franchises in the state.
“In South Australia, the master franchisee is responsible for identifying and establishing its own restaurants,” the prospectus says.
“The master franchisee has ultimate control over the quantity, timing and investment in new restaurant openings in its jurisdiction.”
Via OTR, Viva owns and operates 10 Guzman y Gomez restaurants, nine in South Australia and one in the regional Victorian border town of Mildura.
The OTR team appears to have struck a pretty sweet deal.
For example, where most franchisees pay a tiered royalty fee of between 8 per cent and 15 per cent of net weekly sales, the South Australian master franchisee agreement has a fixed royalty rate of 4 per cent to 5 per cent.
OTR pays a marketing levy of 0.75 per cent of net restaurant sales compared with the standard 3 per cent levy, but OTR has responsibility for marketing in the state.
Viva and Guzman y Gomez are joined at the hip for a long time; the original master franchise agreement started when OTR opened its first restaurant in October 2017, and is set to run for 10 years with four options to renew for 10 years each.
“The master franchise agreement has a remaining term of 43 years,” the Guzman prospectus says.
Jevan Bouzo, the CEO of Viva’s convenience and mobility division, who came across the OTR deal, has said the two companies have a good relationship and would continue to work together.
Given Guzman y Gomez’s growth plans are predicated on getting to 1000 stores across Australia over the next two decades, maintaining those strong ties will be important for both amigos.
Extracted in full from: https://www.afr.com/chanticleer/this-asx-giant-is-a-secret-winner-from-guzman-y-gomez-float-20240620-p5jnbu
