Viva Energy will buy Coles Express to become Australia’s largest fuel and convenience operator, pouncing with a $300m deal after several tough years as the Covid-19 pandemic dampened fuel sales.
An alliance deal between the pair had been due to run until 2029 but will now be axed with Viva to take on full ownership of 710 sites across Australia and 6000 Coles Express staff to be offered roles under its new owners.
Coles will see $816m or about 10 per cent of its overall lease liabilities removed from its balance sheet while the move will also ease the Scope 3 emissions burden of its customers.
Viva pointed to “meaningful” earnings growth potential once fuel volumes recover along with plans to target electric vehicle charging options and hydrogen for heavy transport later this decade.
Coles said its Express service stations delivered the lowest return on capital among its broader retail business, opting to exit given much higher margins from its mainstay supermaket and liquor units.
Coles Express delivered earnings of $42m to Coles in the 2022 financial year, representing 2 per cent of overall group profits, which are dominated by its supermarkets and liquor businesses.
“This is the lowest return on capital business in the group,” Coles chief executive Steven Cain told analysts.
“We did expect that to improve in the future as fuel volumes improve – but the returns we can get out of supermarkets and liquor in our opinion are far, far greater.”
The alliance between the pair was due to run until 2029 but modest fuel volumes may have played a part in the decision, decimated through the Covid-19 pandemic.
Coles and Viva had a target for the alliance to deliver 70-75 million litres per week but Coles said on Wednesday it had only hit 60 million litres three times in the last three years.
Viva said the pandemic had soured volumes, but he expects it will edge back up closer to 65 million litres as drivers return to the road.
“We see continued recovery in the markets that have been most affected, which is predominantly Sydney and Melbourne. And as mobility starts to improve, we believe that getting back to 60-65 million litres in the near-term is quite achievable,” Viva chief executive Scott Wyatt said. “And beyond that, as things start to normalise, the potential is there to get back to 65 to 70 million litres in the medium term.”
Coles owned the business for nearly two decades and said annual profits peaked at $200m when shopper dockets were as much as 18c per litre. The competition regulator stepped in during 2013 to cap discounts at 4c a litre over concern the savings were being subsidised by Coles and Woolworths’ supermarket divisions.
Coles closed down 0.9 per cent, or 15c, at $16.60, with Viva up 4.6 per cent, or 12c to $2.75.
JP Morgan said while the deal had landed faster than the market was expecting, Viva had previously flagged it would make a move.
“Overall, we think this deal makes sense, offering additional flexibility to the company from a strategic and operational standpoint whilst also looking accretive to earnings and value,” JP Morgan analyst Mark Busuttil said.
“Near term, we expect the focus will be on optimising the store network, with an emphasis on improving under- performing assets. Over the medium to long term, we expect this deal will better position the company to meet the energy transition.”
Viva said the impact on its balance sheet was $143m after taking into account working capital and existing fuel stock, with the deal to be funded from existing cash reserves and debt.
One-off integration costs for Viva were expected to be approximately $120m-$140m over the next three years with the buyout, subject to competition regulator approvals, to close in the first half of 2023.
Viva said the convenience stores will continue to trade under the Coles Express brand on a transitional basis, but over time will carry a new store brand.
Existing loyalty programs, including participation in FlyBuys and the 4c per litre fuel discount dockets with Coles supermarkets, will continue, according to Viva.
Viva said the deal hands it $1.14bn of convenience store sales revenue on a pro-forma basis for the 2021 financial year, $45m-$70m to last year’s retail earnings on a replacement cost basis and earnings per share accretion of 11-18 per cent relative to 2021.
Viva tripled its dividend after delivering a jump in first-half earnings in August. Refining earnings soared 747 per cent to $371m while its retail, fuels and marketing earnings rose 14 per cent to $252m.
Extracted from The Australian
