VIVA IN $300M DEAL TO BUY COLES EXPRESS FUEL NETWORK

21/09/22; AFR

Viva Energy will take full control of the Coles Express fuel and convenience retailing network and start offering customers lower-carbon energy products, after a $300 million deal with Coles Group that paves the way for the supermarket chain to consider a share buyback.

The deal, announced on Wednesday, accelerates Viva’s strategy to get more exposure to the fast-growing convenience segment through full ownership of the 710 Coles Express sites.

It will also be better able to consider investments in the network for electric vehicle charging and hydrogen refuelling to suit consumers’ changing needs, Viva chief executive Scott Wyatt said.

For the nation’s second-largest grocer, the deal will free its balance sheet of more than $800 million in lease obligations and leave it able to consider capital management, while reducing concerns about Scope 3 emissions.

Mr Wyatt told The Australian Financial Review that Viva was the “natural owner” of the fuels retail business, which would be rebranded after the deal completes, expected in the first half of 2023. About 6000 Coles Express staff and support workers will be offered roles with Viva.

Shares in Viva were up 4 per cent at $2.74 at 2pm, while Coles shares were unchanged at $16.72.

“The timing is good for us,” Mr Wyatt said. “We’re at a point where the retail market is recovering, and so there’s good fuel growth ahead of us, but it’s also coming at a time when consumer needs have changed significantly as a result of the pandemic.

He said it would give Viva many opportunities to introduce new low-carbon energy offerings to customers, including EV and hydrogen fuel cell recharging, as well as extending the range of convenience products.

Coles Express has until now been operated under an alliance between Viva and Coles, which has been restructured over the years to increase Viva’s influence.

Mr Wyatt signalled last November that Viva was potentially looking to take over the operations in 2029 when the contract was up for review.

Viva said that after taking into account working capital and existing fuel stock, the net impact of the acquisition was $143 million.

Coles customers will continue to access existing loyalty benefits, including the 4¢/litre fuel discount offer, and earning and redeeming Flybuys points at sites trading under the Coles Express banner.

Coles CEO Steven Cain said the transaction would allow it to focus on its key omnichannel supermarket and liquor businesses, and march towards his ambition of becoming Australia’s most sustainable supermarket group.

“We’ve all got to stay on the road … as we go about our business, but businesses are transitioning, and from a Scope 3 point of view, this will be positive for Coles Group,” he said.

Mr Cain said given the difficulties that Coles Express had faced over the past two years amid restricted travel, now was a good time to sell after almost two decades of ownership.

In fiscal 2022, Coles Express posted sales of $1.13 billion, EBIT of $42 million and imputed lease interest of $38 million. Coles Express accounted for $816 million of group lease liabilities – about 10 per cent of the total lease portfolio.

In response to whether Coles would consider a buyback, CFO Charlie Elias said there was clearly balance sheet capacity once the deal was finalised.

The profitability of Coles Express peaked about $200 million. A turning point in the business came in 2013 when both Coles and Woolworths were forced to stop making large fuel savings offers on “shopper dockets” after an investigation by the competition regulator. These discounts are now limited to 4¢ per litre.

Deal completion is expected in the second half of the financial year, but it first needs the tick of approval from the Australian Competition and Consumer Commission and Foreign Investment Review Board.