Caltex rebrand strengthens Couche-Tard’s stance on value

Angela Macdonald-Smith Senior Resources Writer

Jan 6, 2020

AFR

Caltex Australia’s looming loss of its household brand name may play into the hands of its Canadian suitor Alimentation Couche-Tard, as analysts count the cost of its rebranding to lesser-known Ampol while already stiff competition in fuels retailing intensifies.

The pre-Christmas deal announced by Caltex gives it only two years more exclusive use of its name and three years before it must drop it altogether, as Chevron will presumably reclaim the brand for its re-entry into Australian petrol and diesel retailing through its surprise $425 million takeover of Puma Energy’s local network.

Caltex’s planned transition to the Ampol brand has raised questions around its valuation. Peter Rae

Both the rebrand and Chevron’s re-entry are thought to have come out of left-field for Couche-Tard, and look likely to strengthen its stance that its $34.50 a share offer for Caltex – rejected by the target as inadequate – already offers good value.

Caltex was prepared for Chevron’s decision, if not for the exact timing of it, having carried out extensive work on the transition to Ampol. It had been facing a steady increase in licence fees to use the Caltex name since Chevron’s exit from its register.

However, the rebrand means Caltex, the country’s largest fuels supplier, is reliant on building up familiarity with a name that has been absent from the Australian market for about 20 years in the face of direct competition from its former 50 per cent owner.

It estimates the rebrand will cost $165 million over three years, only slightly offset by a $18 million to $20 million a year saving on licence fees.

This comes as other offshore entrants into the Australian market such as UK-based EG Group, which swallowed the Woolworths petrol network in November 2018, have already sharpened competition in the sector, eating into retail margins last year. Caltex rival Viva Energy has also locked in exclusive use of the world-renowned Shell logo in Australia for another 10 years to 2029.

‘Execution risk’

The developments raise questions in the market around Caltex’s stance that Couche-Tard’s proposed $8.6 billion offer undervalues it. The Canadian convenience retailing giant may have expected to use the Caltex brand should its takeover succeed, given its own Couche-Tard and Circle K logos draw a blank among Australian motorists.

It is likely also to have been surprised by the re-entry of Chevron, with its strong Asian refining and distribution network, which only exited fuels retailing in Australia four years ago through its $4.6 billion sale of its Caltex stake.

The timing is arguably awkward for Caltex, which is still grappling with a revamp of its convenience retailing business – a process which some analysts and investors have little confidence will yield the targeted earnings uplift. It is also hunting for a new chief executive, with retiring Julian Segal flagging he expects to exit by mid-2020.

Standard & Poor’s deemed that the transition to the Ampol brand “will add execution risk” to Caltex’s convenience retail strategy.

“In our view, the branding change and stiffer competition for downstream petrol stations in Australia will further pressure Caltex’s competitive position,” S&P said, describing its credit metrics as “stretched” for a BBB+ rating.

It said Chevron’s Puma acquisition combined with the rebrand “are likely to intensify competition in the Australian petrol retailing market and could weaken Caltex’s business risk profile if the company struggles to defend its market position”.

Mr Segal sees it differently. “It will be a significant positive rather than a negative,” he said, pointing to the example of Z Energy in New Zealand, which created a successful home-grown brand on dropping the Shell name. “It’s an opportunity to have a unified brand and to be in control of our own destiny.”

Sources also point to the valuation multiples on the Puma and Woolworths petrol sales, which make Couche-Tard’s offer for Caltex look solid, albeit on a much larger and higher quality network than Puma.

They say Couche-Tard’s offer for Caltex represents an enterprise value-to-EBITDA multiple of 11 times, compared to 7.7-8.8 times for the Puma deal (as calculated by Baden Moore, analyst at Couche-Tard adviser Goldman Sachs) and 7.3 times for Woolworths Petrol.

That takes into account the fuels and infrastructure assets at Caltex – including the barely profitable Lytton refinery in Brisbane – which could be expected to warrant a lower, rather than higher, multiple than pure retailing.

Still, Caltex points to support from the bulk of its institutional shareholders for its insistence that somewhere north of $34.50 a share is justified. The transition to Ampol does not affect Caltex’s own planned initiatives, including its retail property IPO, which would see about half of its franking credits distributed to shareholders within about six months.

The pre-Christmas stand-off between the pair over access to non-public information on Caltex and confidentiality agreements has lasted over the quiet holiday season. The next step is still expected to be a presentation by Caltex senior management to their counterparts at Couche-Tard.

But assuming those issues are overcome, the events of recent weeks look to have put the pressure back on Caltex to justify why its business warrants the current offer price, before it can push again for a higher one.