ACCC to review EG takeover bid for Caltex

The competition watchdog is asking competitors and suppliers whether the deal will lift fuel prices for Australian motorists.

The competition watchdog has launched a merger review of EG Group’s bid for Caltex, asking competitors and suppliers whether they believe the potential acquisition will lift fuel prices for Australian motorists.

The inquiry was launched after Caltex rejected EG’s initial takeover offer on Monday, and after a major ratings agency cast renewed doubts on the heavily-indebted British company’s ability to bankroll another major expansion.

Caltex said EG’s complex $3.9bn offer for its 749 fuel stations and convenience stores, plus a listed spin-out of its refining and infrastructure business, undervalued the company.

Although it is unclear whether EG, which bought Woolworths network of 540 fuel stations for $1.7bn in 2019, will return with a ­revised offer, the Australian ­Competition & Consumer Commission launched the informal review on Friday, seeking the market’s views on whether the acquisition was likely to lead to higher fuel prices.

“In particular, we are seeking your views on whether the proposed acquisition would be likely to lead to higher fuel prices; how closely EG and Caltex compete, both locally and across major metropolitan areas, and whether other fuel retailers will compete strongly with EG after the acquisition,” the ACCC’s letter said.

The regulator was also seeking views on EG and Caltex’s roles in the price cycles that operate in major metropolitan areas, the letter said.

In late 2017 the ACCC blocked a bid by BP to take control of Woolworth’s fuel store chain, arguing that such major consolidation in the fuel station sector — more than 1400 service stations nationally take fuel from BP, and it sets prices at 350 of them — could drive up prices nationally.

The ACCC has given competitors, motoring groups and customers until June 11 to make submissions.

Caltex’s rejection of the EG offer put Canada’s Alimentation Couche-Tard, already conducting due diligence on the Australian fuel major, in the box seat in the bidding war.

But as EG considers its next move, Moody’s Investor Services threw further doubt on the EG proposal, downgrading its credit outlook to negative from stable, citing its expectation the company’s earnings would have fallen in the final quarter of 2019, raising its debt to earnings ratios.

“The higher leverage reflects weaker EBITDA generation in the last quarter of 2019, particularly in the US, driven by rising fuel prices and correspondingly shrinking fuel margins, which Moody's expects to partly, but not fully, revert in early 2020,” Moody’s analysts said.

EG has global debts worth about £7.3bn ($13.9bn), according to Bloomberg.

While Moody’s left EG’s global credit ratings intact, the ratings agency said it was concerned that another acquisition could “stretch the management team, having only recently closed acquisitions in the US and Australia”.

“Moody's remains concerned about the ability of the company to control its rapidly expanding ­operations across three continents and different operational formats,” Moody’s said in a March 3 note.

Caltex shares closed down 80c, or 1.9 per cent, at $32 on Friday.