Bidding war for Caltex Australia lacks fuel

Hong Kong

A QUASI-BIDDING war for Caltex Australia is missing some fuel. The transport gas provider and petrol station operator has received takeover interest from suitors including UK-based privately owned EG Group, increasing pressure on Canada's Alimentation Couche-Tard to sweeten its A$8.7 billion (S$8.07 billion) offer, earlier rejected. But a pumped-up bid will see its costs exceed any likely returns. And its newly-named rival doesn't have deep pockets either.

Run by Quebec billionaire Alain Bouchard, US$37 billion convenience store empire Couche-Tard was given a chance last month to increase its bid for Caltex. He is now head-to-head with Britain's billionaire Issa brothers, whose acquisitive fuel retailer owns roughly 5,000 petrol stations and convenience stores globally.

Last year EG bought Australian supermarket chain Woolworths' gas station business and hired former Caltex executive Mike McMenamin to run it. News of fresh potential interest boosted Caltex, and its stock is now trading marginally higher than Couche-Tard's A$34.50 offer.

That offer is already a stretch for the Canadian suitor.

Caltex's post-tax operating profit in 2020 will amount to A$560 million, using forecasts compiled by Refinitiv. That means the return on invested capital from the rebuffed price would amount to just 5.6 per cent, according to Reuters calculations, well below the target's 8 per cent cost of capital, estimated by Morningstar analysts.

The Canadian company could extract more value by selling Caltex's fuel and infrastructure division and using the retail business as a platform to expand into the rest of Asia, and there could be some limited procurement synergies in buying more fuel itself.

But Couche-Tard is only present in Europe and North America, and there won't be substantial savings between convenience-store chains on different continents.

Meanwhile, EG's high leverage means its credit rating won't support more debt-fuelled deals until there is evidence of achieving cost-saving targets, according to ratings-agency Fitch.

So, for Caltex, it's only a possible relief from a fraught go-it-alone listing plan. Outgoing boss Julian Segal wants to sell a minority stake in 250 properties through an initial public offering.

But Australia's capital market is littered with recent casualties. Issuers including non-bank lender Latitude scrapped 21 IPOs last year, the worst year for new issuance since 2012, Dealogic reckons. What's more, former backer Chevron recently said it would take back the Caltex brand. All sides look like they are running on empty. REUTERS