Asian fuel glut changes the game in Caltex takeover talks

Couche-Tard boss Brian Hannasch. Illustration: Eric Lobbecke.

Global oil refinery giants like Chevron look at Australia as a potential saviour amid the growing Asian surplus, which leaves Australia short on the edge of a market that is decidedly long.

As Canadian petrol retail group Couche-Tard sits down to presentations from Caltex management on Thursday, this short position will be stressed.

In theory it opens the door for a range of possibilities — for the company as an ongoing entity and for any potential bidder.

Couche-Tard boss Brian Hannasch is in Sydney with senior executives for the presentation, which will run over the next two days.

Caltex will confirm the talks when he signs the confidentiality and standstill agreements, which will open the door to limited due diligence. The company is expected to release a statement early on Thursday.

It will also open the door for a potential bidding war for the company, even if the Canadian group has gone out of its way to play down any increase in the value of the $34.50-a-share, $8.6bn proposal.

Some analysts say that with Couche-Tard trading around 11.3 times forecast earnings before interest, tax, depreciation and amortisation, the company has room to pay up to $40 a share, given Caltex is trading at around 8.8 times forecast earnings.

That is Caltex chairman Steven Gregg’s dream scenario but there are plenty of hurdles to jump before then.

While these play out the Caltex petroleum short is the thematic surrounding the battle.

There is excess refining capacity in Asia and this means a known market like Australia is like a gold mine to get rid of surplus supply. The Australian market is around 57 billion litres and refined capacity is 25 billion litres, which means a shortfall of 32 billion litres. Caltex is short 11 billion litres.

When Chevron sold out of Australia back in March 2015 it sold Caltex at $34.20 a share — a 10 per cent discount to the then market price of $37.88.

Chevron is now keen on building its Australian retail power as Asia’s supply excesses build.

In 2020 Couche-Tard is proposing a bid at around $34.50 and the market is at $35.74.

You may wonder what has happened in the meantime.

Two things are the establishment of the Ampol trading arm in Asia, which can pick up the best price possible, and the growing Asian refining surplus.

Clearly the brains at Chevron were not switched on to the possibility of either event which explains why it is back in the game in Australia, buying Puma last year.

With the wonderful benefit of hindsight, establishing the Ampol unit was one of the smartest things chief executive Julian Segal has done at the company, giving it its independence at just the right time.

Now Chevron is taking back the Caltex name in three years. The Ampol name can be both revived and sold forward as a newcomer like New Zealand’s Z Energy.

That will also be in the plans at Couche-Tard and Britain’s EG Group, which acquired the old Woolworths outlets in late 2018 for $1.7bn.

With Chevron in the mix, Couche-Tard and EG are working overtime with the ACCC to get a workable proposal on the table, and Caltex’s stock price has risen some 50 per cent since its August lows.

The Caltex talks may well also include Couche-Tard founder Alain Bouchard, who is well known to Caltex’s Gregg.

The Caltex team in the talks will be led by outgoing chief Segal, internal heir apparent Louise Warner, retail boss Joanne Taylor, finance chief Matt Halliday and strategy chief Alan Stuart Grant.

Thursday’s session is aimed at a detailed run-through of the existing operations with Friday focused on industry issues like the Asian short.

The Couche-Tard team is, naturally enough, playing down a higher price.

This is harder to achieve after Caltex said last week said it had fielded multiple approaches for all or some of its assets, including one from EG Group.

China is under pressure to increase its export quotas and as it does that there will be more supply looking for a home, which explains why Chevron acquired Puma in Australia late last year.

It is a wildcard in the Caltex battle.

It could simply wait for the retailers to battle it out and then buy out the wholesale assets from the winner.

Another possible entrant is Viva, which may be interested in the Lytton refinery at a bargain price, given none of the above would take much of an interest.

EG’s 540 Woolworths outlets account for about 10 per cent of the Australian market.

Caltex is the market leader with around 18 per cent, followed by Coles (Viva) at 16 per cent, 7-Eleven at around 15 per cent and BP at around 10 per cent.

EG has hired Gilbert & Tobin’s competition ace Gina Cass-Gottlieb to help present a case that would also allow it to buy the market-leading Caltex sites.

At first glance, given BP was knocked back in 2017 from buying the Woolworths sites, one would think EG had no chance of buying Caltex.

At the time Woolworths was a price discounter, given fuel was a way of getting people to buy more at its supermarkets.

BP was a price leader so that, combined with multiple geographic overlaps, killed the proposed deal.

As EG is primarily a convenience retailer it, too, would be a discounter so the first objection would be absent, but the geographic overlaps are many.

Suffice to say Cass-Gottlieb could craft a deal to get ACCC clearance.

The fact she is in the room tells you EG is keen, but until it says so publicly the ACCC has yet to formally notify of an investigation that is well and truly under way.

Any FIRB clearance would first require ACCC approval.

Given Lytton is one of just four refineries left in Australia FIRB may take an interest on defence and security grounds.

All this means Couche-Tard has plenty of potential competition and Caltex chair Steven Gregg will have the confidence to play hardball in the talks over the next couple of days.