VIVA ENERGY TO ACQUIRE OTR GROUP, TRANSFORMING VIVA ENERGY’S CONVENIENCE AND MOBILITY RETAIL BUSINESS

Transaction overview

• Viva Energy to acquire OTR Group for $1.15 billion from Peregrine Corporation, implying pro forma FY2023 (June-end) EBITDA (RC) multiple of 7.0 times post synergies¹;
• Transaction completion subject to customary regulatory approvals including FIRB and ACCC.

Strategic rationale

• Supports Viva Energy’s vision to be Australia’s leading convenience retailer, with a pathway to establish more than 1,000 stores;
• Secures cutting edge convenience capabilities (OTR generates >70% of earnings from non-fuel retail)² which would otherwise have taken years to develop;
• Diversifies earnings exposure, lifting the share of earnings from non-fuel sources from ~30% (post Coles Express) to an expected ~50% of the Convenience & Mobility business³;
• Accelerates earnings growth of Viva Energy convenience business and integration of Coles Express acquisition through OTR proven product offering, synergies, associated brands, quick-service restaurant operations, advanced technology and supply chain capability.

Financial impact

• EPS accretion of 6% to 26% (6% on pro forma FY2022 basis, 11% on normalised FY2022 based on historical average Refining earnings and 26% relative to FY2021)⁴;
• Further earnings potential from the OTR development pipeline (90 sites) and upgrading the Coles Express network to the OTR offer;
• Self-funded acquisition via $1 billion of debt and working capital, and $150 million equity issuance to sellers (subject to 12-24 month escrow, ensuring alignment);
• Maintains Viva Energy’s prudent capital structure with additional capacity for further capital management and acquisition opportunities.

About OTR Group

OTR Group (“On the Run”) is a leading independent convenience retailer in Australia, generating more than $3 billion of revenue annually and employing approximately 6,500 people. OTR Group comprises:

• The OTR Convenience Retail network of 205 company owned and controlled leasehold stores operating under the OTR brand, comprising 174 integrated fuel and convenience stores and 31 stand-alone stores. The network also includes 92 stores which incorporate quick service restaurants (QSRs) operated by OTR. The business has leasehold rights to a growth pipeline of 90 sites, largely outside of South Australia, which will be developed into new OTR stores over the next few years;
• Smokemart and Giftbox (SMGB) provides tobacco and cigarette wholesale arrangements to OTR and other retail third-party networks. Its retail network consists of 257 company owned and controlled leasehold stores across Australia, together with an online retail website;
• Mogas Regional and Reliable Petroleum wholesale fuel and lubricant businesses which service customers in regional South Australia.

The OTR Convenience Retail network is the main earnings driver of the group, generating ~70% of EBITDA in the FY2023 (June-end) forecast period. We believe it is the most sophisticated convenience offer in the Australian market, leading innovation through a wide range of products and services including Drive-Thru, a 24-hour network (“We Never Close”), and mobile apps for pre-ordering, pre-payment, and delivering loyalty offers to customers.

Transaction overview

Viva Energy Group Limited (the Company or Viva Energy) has entered into a binding agreement to acquire the OTR Group for a total consideration of $1.15 billion from Peregrine Corporation. The OTR network and wholesale fuel businesses will be acquired by way of share sale, while the SMGB business will be via asset sale.

The consideration will be funded through $1 billion of debt and working capital, and an equity component of $150 million to be issued to the sellers. The debt component will be funded through existing debt facilities plus bridging finance, with long-term debt facilities put in place over time. Of the equity component, 50% will be escrowed for a 12-month period following completion and the remainder will be escrowed for a 24-month period. The number of shares issued to the sellers will be based around the 20-day volume weighted average price (VWAP) prior to signing the deal (subject to adjustments if the Company issues shares at a price lower than the VWAP in the period prior to completion).

Approximately 6,500 OTR team members and support centre staff will join the Viva Energy Group on their current terms and conditions. Viva Energy will retain the OTR head office in Adelaide which, along with the existing Melbourne-based team, will service the Group’s Convenience and Mobility business over time.

OTR Founder, Mr Yasser Shahin, will be retained by Viva Energy to support the existing OTR Group and transition the business to Jevan Bouzo, Viva Energy’s CEO of Convenience & Mobility. Their combined priorities will be to integrate the businesses, build the operating structure, further develop the OTR network, test formats for deployment into the Coles Express network and realise synergies.

Completion of the transaction is expected to occur in the second half of 2023, subject to customary FIRB and ACCC approval. In the event that completion does not proceed, the parties have agreed to certain fall-back provisions for ongoing supply and the transfer of the commercial bulk fuels business (also subject to regulatory conditions) on commercial arms’ length terms.

Strategic rationale

The acquisition of the OTR business further delivers on Viva Energy’s strategy to grow high-quality, non-fuel earnings streams, and provides a significant opportunity to unlock procurement and supply chain synergies.

The acquisition of Coles Express, announced in September last year, secures operational control of the convenience business across more than 700 stores, together with the organisational capability and wholesale supply arrangements to support and execute the existing Coles Express offer. The acquisition of the OTR Group secures leading convenience and quick service restaurant capability to rapidly deploy new formats across the network and further transform our convenience and mobility business in the following areas:

• Bring together the OTR, Coles Express and Viva Energy Retail businesses to establish a nationwide convenience network with a pathway to more than 1,000 stores, and capability for a market-leading convenience and mobility offering in Australia;
• Immediately increase the earnings contribution from Convenience from ~30% to ~50% of the Convenience & Mobility business, reducing dependency on income from traditional fuels and increasing exposure to the fast-growing convenience sector;
• Extend the proven OTR convenience offer and technology platforms to Coles Express stores that can support the format, taking the OTR brand nationally and growing convenience sales. OTR’s convenience sales per store are, on average, more than double what is achieved through the Coles Express network presenting considerable growth upside;
• Achieve significant scale and synergies in procurement, marketing and functional support. OTR substantially reduces the time and cost of setting up infrastructure to replace the transitional services arrangements provided by Coles Group, by transitioning directly to proven and existing back-office infrastructure;
• Combine the best of the Coles Express and OTR digital and loyalty offers into one compelling customer proposition. The OTR digital platforms provide customers with fuel, QSR and convenience rewards and discounts, which supports higher sales through cross-selling convenience and fuel products;

CEO Commentary

Viva Energy’s CEO and Managing Director, Scott Wyatt, said today’s acquisition is transformational for Viva Energy and that OTR will become Viva Energy’s flagship convenience brand, replacing the Coles Express brand over time.

“The introduction of OTR’s superior convenience offering, including quick serve restaurants, will help revolutionise the diversity and attraction of our retail offering,” Mr Wyatt said. “As our stores increasingly become retail destinations, we expect convenience earnings will grow and reduce our dependency on traditional fuels.”

“OTR outlets offer an attractive and welcoming store environment, supporting increased dwell time, which is likely to be a key factor in successfully introducing electric vehicle recharging facilities over time.”

Mr Wyatt said that over the past three decades the Shahin family has built OTR into one of the most successful integrated convenience and fuel offerings in Australia.

“We are excited about the opportunity we have to take this proud South Australian business and brand nationally and are pleased to have Yasser Shahin work with us as we commence this journey,” he said. “We also look forward to welcoming approximately 6,500 OTR team members to the Viva Energy business, learning from them and working with them to lift the standard of convenience retailing in this country.”

OTR Founder, Mr Yasser Shahin, said, “Today’s announcement marks an incredibly exciting time for our company. This transaction delivers the realisation of the vision I have always had, and vigorously pursued; to see OTR become national, to be the leading convenience brand in Australia and to remain true to our roots and based in Adelaide.”

“The coming together of one of Australia’s best retail networks with one of Australia’s leading convenience offerings has enormous industrial logic,” he said. “I will continue to support the business following completion of the transaction, and the entire team and I are completely committed to the successful integration of these businesses. The Shahin family is committed to continuing to see Adelaide as the home of OTR and Viva Energy have provided for the realisation of a larger, enhanced OTR to continue to be headquartered here.”

Financial impact

We expect the acquisition to deliver:

• $4.2 billion of sales revenue on a pro forma forecast FY2023 (June-end) basis, comprising $2.4 billion of non-fuel sales;
• Adds $165 million EBITDA (RC) post integration and synergies1, of which $15 million to $20 million will be allocated to Commercial & Industrial;
• Corresponding EPS accretion of 6% to 26% (6% on pro forma FY2022 basis, 11% on normalised FY2022 based on historical average Refining earnings and 26% relative to pro forma FY2021)⁴.

The integration of OTR into the Viva Energy Retail and Coles Express networks is expected to drive synergies of approximately $60 million per annum, to be realised in three years, through cost and efficiency improvements, supply chain procurement, operations, technology systems and marketing.

We expect an additional $10 million to $15 million in annual maintenance capex, lifting total maintenance capex for the Convenience & Mobility business to approximately $80 million per annum (including Coles Express). The development of the growth pipeline (90 stores) and the extension of the OTR offer to the Coles Express network is expected to add over time approximately $50 million of growth capex per annum, subject to achieving satisfactory returns from this investment.

Stamp duty and advisor costs will be between $15 million and $20 million, with no additional transaction and integration costs as result of capex and cost synergies associated with the Coles Express acquisition. We anticipate significant synergies by scaling the existing OTR enterprise resource planning (ERP) system and proprietary mobile app across the broader Viva Energy Retail network.

The transaction is expected to result in the recognition of right-of-use assets and lease liabilities of approximately $950 million.

Following the completion of the OTR and Coles Express acquisitions, we expect net debt to EBITDA in the range of 0.6 times to 0.8 times⁵. The acquisition will be funded by a new standalone term debt facility of A$600 million together with utilising capacity in our existing debt facilities of US$700 million, which are largely undrawn. Longer-term debt facilities will be put in place over time. We will maintain a conservative leverage profile, maintaining capacity for further capital management and acquisition opportunities.

Notes:

1. Earnings contribution is calculated using OTR Group’s pro forma FY2023 (June-end) forecast period including synergies. Estimated run-rate synergies of approximately $60 million per annum are anticipated in three years following completion. RC is a non-IFRS measure under which the cost of goods sold is calculated on the basis of theoretical new purchases of inventory instead of historical cost of inventory. This removes the effect of timing differences and the impact of movements in the oil price.
2. Based on average non-fuel gross margin contribution of FY2021 and FY2022 (June-end).
3. Increase in gross margin from non-fuel sales is based on OTR’s FY2023 forecast (June-end) period compared to Convenience & Mobility (Retail) business’s pro forma FY2022 (Dec-end) period, including Coles Express. Convenience & Mobility and Commercial & Industrial align to Retail, Fuels & Marketing: Retail, and Retail, Fuels & Marketing: Commercial.
4. The EPS accretion range of 6% to 26% is relative to Viva Energy’s pro forma FY2022 and FY2021 results (including Coles Express). The historical average Refining contribution assumes $200 million EBITDA based on 5-year average between FY2018 and FY2022, excluding FY2020. Viva Energy reports its ‘Underlying’ performance on a “replacement cost” (RC) basis.
5. Target gearing range relates to term debt which can better align with duration of new growth opportunities. Net debt range based on term debt of between $600 million and $800 million, with the remainder funded through the existing facilities. EBITDA in net debt calculation based on FY23F Convenience & Mobility pro forma EBITDA, Commercial FY2022 EBITDA and 5-year average of Refining EBITDA between FY2018 and FY2022, excluding FY2020.

Authorised for release by: the Board of Viva Energy Group Limited