Z Energy to run multi-brand strategy following Caltex acquisition

Tuesday 2nd June 2015

Z Energy says it is committed to running a multi brand strategy following the acquisition of the Caltex and Challenge! brands from Chevron New Zealand in a $785 million deal announced this morning after details leaked to the Australian market on Friday.

The deal will give Z some 49 percent of the retail petrol station market and will require clearance from the competition regulator, the Commerce Commission, which it hopes to receive by November.

Shares in the company, which also owns a 26 percent share of the Marsden Point oil refinery and supplies the aviation and shipping markets, were trading at $6.18 mid-afternoon, a 21 percent jump on Friday's closing price, and briefly touched a record $6.19. The deal is expected to be "earnings accretive" from day one, adding 34 percent to earnings per share before counting anticipated synergy benefits of between $15 million and $25 million a year starting in 2017.

Z Energy chief executive Mike Bennetts insisted at a briefing that the decision not to change the Caltex and Challenge! petrol brands to Z was not simply to give the regulator assurance that the domestic transport fuels market would remain competitive if Z was allowed to complete the transaction.

The two companies ran distinctively different business models, with Z concentrating on a "full service" offering, including food, coffee and car washes while Caltex was more focused on fuel sales, including having a "much better" truck stop operation than Z's.

"We would destroy the value (in Caltex) by turning it into Z," said Bennetts, who noted that Caltex's rates of return were stronger than Z's, although the company had chosen not to make much capital investment in its network in recent years. Z claims 28 percent of the transport fuels market against Caltex/Challenge!'s 21 percent. An average Z service station sells 5.3 million litres of petrol and diesel annually, compared with an average 4.3 million at Caltex and Challenge! sites.

The Commerce Commission application included a study of the existing level of overlap between the two chains' retail sites within both a two kilometre and five kilometre radius. All existing Caltex staff have been guaranteed employment for the first 12 months of the merger.

Z has rights to the Caltex brand for two years. Challenge! petrol stations are owned by the Farmlands co-operative group, with the franchise licenced from Chevron NZ, which is exiting the downstream oil and gas industry in New Zealand at the same time as it has invested for the first time in upstream activity, taking a stake in a deep sea exploration area off the Wairarapa coast last year.

The purchase price equates to 5.9 times estimated replacement cost earnings before interest, tax, depreciation, amortisation and financial instrument value changes, Z's preferred earnings measure.

Caltex turned over $2.24 billion last year, around 75 percent of Z's turnover, and reported RC Ebitdaf of $132 million, some 54 percent of Z's. A pro forma combination based on Caltex's 2014 results and guidance for the 2015/16 year from Z would give the combined company earnings RC Ebitdaf of $387 million, an increase of 52 percent on Z's 2014/15 result before synergies.

Bennetts expects Caltex to join the joint venture refinery optimisation scheme that Z already operates with BP New Zealand and expects Z's crude oil procurement practices would prove more competitive than Chevron's, since the latter was often required to purchase from its global owner rather than being a "free agent" as Z is.

Bennetts also talked up the "soft benefits" of the merger, saying it would mean nearly half of New Zealand retail transport fuel sales would be through locally owned service stations and more of the profits of the enlarged Z group would be retained in New Zealand, not withstanding that Z's foreign investors are a large enough group to require the deal to be cleared by the Overseas Investment Office.

He indicated that Caltex's use of the AA Smartfuel loyalty programme would continue, despite Z being a shareholder in Loyalty NZ, operator of the competing FlyBuys scheme.

The long term future of a joint venture between Mobil and Caltex to supply aviation fuel at Auckland International Airport had yet to be considered. A full strategic review would occur after settlement of the transaction, said Bennetts.

"I can't predict what might happen in five, 10, 15 years' time." He stressed Z would behave in a way that upheld its recent Colmar-Brunton ranking as New Zealand's second most reputable corporate brand, a position achieved just five years after it bought the downstream assets previously owned by Shell's New Zealand arm.

Bennetts said he was "very concerned" at the leak of information about the deal, which saw the Z share price move up sharply in late trading on the ASX on Friday, prompting a trading halt on the dual listed company's stock in that market that day, mirrored by a trading halt on the NZX this morning. No halt was required in New Zealand yesterday because it was a public holiday.

A report in the Australian Financial Review's 'Street Talk' column this morning carried substantial detail of the transaction.

"I'm very, very disappointed that that has come out of the marketplace," said Bennetts. "It doesn't serve anyone well at all."

The company would not be lodging a complaint but was ready to answer questions from either stock exchange, if necessary.

BusinessDesk.co.nz

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