Fuel security woes amp up tensions around Caltex bid

Angela Macdonald-Smith and Simon Evans

Nov 30, 2019

AFR

Caltex Australia’s Canadian suitor, Alimentation Couche-Tard, looks set to face mounting pressure to guarantee the future of the target’s Brisbane oil refinery as the Labor Opposition, strategic risk and transportation experts underscore the importance of the plant to fuel security.

While Couche-Tard – French-Canadian slang for “night owl” – has yet to secure any agreement from Caltex on its proposed $8.6 billion cash takeover offer, the refinery’s fate is shaping up to be a potential key factor in regulatory approval for a deal.

“Australia’s fuel security is an extremely important issue, especially at a time of heightened security risks,” said Labor’s energy spokesman, Mark Butler, accusing the federal government of being “asleep at the wheel” on the issue for six years.

“Australia’s refineries are an important component of our fuel security, as is the development of a biofuel industry and a transition to electric vehicles.”

Caltex Australia is facing an ownership change, with Canadian suitor Couche-Tard arriving at a time when Caltex is battling.  AFR

Energy Minister Angus Taylor’s office declined to comment, citing the absence of any deal between the two.

Couche-Tard chief executive Brian Hannasch says the Montreal-based group is committed to buying all of Caltex, which operates a fuel-importing and shipping business, distribution, fuel and convenience retailing, as well as the refinery.

Still the lack of any refining or fuel distribution assets in its large portfolio has raised doubts in the market about its commitment to what is one of Australia’s last four remaining oil refineries.

Paul Barnes at the Australian Strategic Policy Institute said that if Couche-Tard intended to discard the refinery, that may very well be a key issue that the Foreign Investment Review Board and its advisers within government would grip down on.

“Profit is not the only factor that should be considered by management and shareholders,” Dr Barnes said.

“One view … could be that the government would need cast-iron assurance that remaining domestic refining capacity could be ramped up in time of need. Strong guarantees of sustained investment in and maintenance of the refining section of Caltex’s domain would be needed.”

The takeover bid comes as Australia’s fuel security situation is already under review given stockpiles of petrol and diesel that fall well short of the International Energy Agency’s 90-day requirement and a domestic refining industry that has shrunk over recent years as plants close.

Australian Trucking Association chief executive Ben Maguire called for the government to hold off from any takeover approval while that review is ongoing. He expects fuel security to be one of the issues front of mind for returning Liberal Senator Jim Molan, who has called for urgent action to improve it.

“Any market change that would reduce our ability in Australia to refine and therefore affect fuel supply would be a major concern,” Mr Maguire said.

The escalation of the debate comes as analysts ponder whether a break-up of Caltex would provide greater value to shareholders than Couche-Tard’s proposed $34.50-a-share bid, which falls to $34 a share once Caltex’s expected 50¢-a-share dividend for the December half is taken into account.

Macquarie calculated that Caltex’s proposed IPO of service stations would extract higher value for shareholders, of $42.06 share, albeit with higher risk, while Jarden estimated the break-up value of Caltex could reach as high as $13.2 billion, including debt, compared to the $10 billion enterprise value of Couche-Tard’s offer. Macquarie said the Caltex board would prefer to extract higher value via the property trust spin-off, of which it would float 49 per cent onto the ASX and that this ”may encourage an interloper bid”.

A crucial point in the takeover battle will occur on December 5, when Caltex holds an investor day and will go into much-greater detail on its strategy imperatives and the returns they want to deliver, including options to unlock its $800 million-plus pile of franking credits. It is however expected to update investors before that on its response to Couche-Tard’s latest approach, which was revised from an initial $32 a share.

The sheer size of Couche-Tard’s operations gives it major advantages in procurement and scale.

It has 16,100 sites, with most of them operating under the Circle K brand. There are 9900 convenience stores across North America but it also operates in Norway, Sweden and Denmark, the Baltic nations, Ireland and Poland.

Contrast that with Caltex’s 800 petrol retailing and convenience store sites.

The Toronto-listed group has also been highly acquisitive, buying 60 businesses in the past 15 years. It operates in 27 countries, selling 43 million gallons of fuel and brewing up 750,000 cups of coffee a day. It also operates an entirely automated Scandinavian service station brand – INGO – where motorists fill up and pay for fuel without any staff on site.

Earlier this year, the parent company also branched into the world of cannabis – legalised for personal use in Canada more than a year ago – with an acquisition.

While North America and Europe are its heartland, Couche-Tard also operates in New Zealand, Cambodia, Hong Kong and Saudi Arabia.

The takeover proposal comes at a weak point for Caltex, which has generally been a frustration for its 40,000 shareholders the past few years. Julian Segal, the company’s long-serving CEO, signalled in August he would step down after after 10 years. Caltex still grapples with weak refinery and retail margins and is midway through an overhaul of convenience retailing.

The arrival of a new chief financial officer, Matt Halliday, in April after 19 years working with Rio Tinto, has given some investors fresh hope. Since he came aboard, there’s been a much bigger focus on capital discipline and investment returns.