Caltex takeover by Couche Tard put off due to coronavirus volatility

Australia’s largest takeover deal has fallen victim to COVID-19 ructions.

Caltex interim CEO Matt Halliday. Picture: John Feder.

Australia’s largest takeover deal has fallen victim to COVID-19 ructions, after Canada’s Alimentation Couche-Tard walked away from its $8.8bn bid for Caltex due to heightened economic uncertainty from the pandemic, piling pressure on the fuels retailer to execute its own growth strategy.

The Canadian convenience store giant was able to secure financing but blamed the financial downturn for its decision to exit until volatility eased, with the door still ajar to reboot a deal once market jitters subside.

Couche-Tard described the current market as highly uncertain.

“The COVID-19 crisis is first and foremost a human tragedy that has impacted millions of people and has also been meaningfully disruptive to economies and businesses around the world, including the Australian fuel and convenience retail industries,” Couche-Tard said.

“Given that uncertainty and the impact it is having on our outlook for Caltex’s business, and consistent with Couche-Tard’s disciplined approach to acquisitions, the company is not in a position to make a revised proposal at this time, despite having secured the necessary financing commitments.”

Caltex shares plunged 7.8 per cent to $21.72. Executing a deal over many months in the current market was ultimately too challenging, Caltex’s interim chief executive Matt Halliday said.

Australian M&A activity in the first quarter of 2020 plunged to its lowest deal value since 2002 amid a severe economic downturn, Mergermarket data shows.

COVID-19 had made it hard “in terms of how to value something and how you manage through a long completion period even if you then manage to get a transaction to go forward in a world like this,” Mr Halliday told The Australian.

“Pausing for now seems to be a sensible course of action.”

The Caltex boss phoned major shareholders on Monday to allay any investor fears and talk through the growth path ahead.

The $9bn fund giant Investors Mutual said Couche-Tard had little choice in the current market but to step aside.

“I guess it’s not surprising that Couche-Tard has pulled out given the chaos that has ensued since they made the offer because of the coronavirus,” Investors Mutual founder Anton Tagliaferro told The Australian.

“There’s every possibility they may come back when things normalise, but the key is what does normal look like and when does that happen.”

Caltex would now focus on rebranding to Ampol and a dual-track process for 250 of its retail sites either through a sharemarket float or potential trade sale after being approached by buyers recently.

“Clearly this has been a fairly unplanned spanner in the works,” Mr Halliday said. “Ultimately, the business now needs to get on and unlock value. If Couche-Tard comes back and that makes sense, then we do that. Our job is to make the company as valuable as it can be and we believe it’s a very valuable company.”

Shareholder Investors Mutual backed the Caltex chief to deliver.

“The balance sheet is still in good shape, they’re still generating cash, they have the property spin-off they’re pursuing and the hybrid securities, which you would think would be very well received given interest rates are so low,” Mr Tagliaferro said. “They have a very capable CEO at the helm.”

Couche-Tard has been in pursuit of Caltex for the best part of six months, lobbing three bids with the first two rejected by Caltex and the third, at $35.25 a share, paving the way for the Sydney fuels retailer to open its books.

However, the rapid onset of COVID-19 has smashed oil prices and roiled fuel demand, raising questions over the desire of any suitor to commit to a large takeover deal amid significant equity and capital markets uncertainty.

Caltex shares plunged by as much as 46 per cent in the period since Couche-Tard’s $35.25 a share offer was unveiled on February 13, signalling the market’s expectation a deal was unlikely to go ahead.

Couche-Tard then hinted a deal may have to be struck at a lower price, given the dramatic change in the value of M&A amid global market turmoil.

The Canadian company remains “highly interested” in formalising a deal once there is sufficient clarity on the global outlook.

Pulling off a deal in the current market was a big challenge, RBC said.

“Clearly, any deal discussions in this environment are difficult and it should not come as a significant surprise that talks have been put on hold,” RBC analyst Ben Wilson said.

The Canadian suitor had mostly completed due diligence which had not raised any material, issues, Caltex said. It had “communicated an intention to seek to re-engage” once clarity on the global outlook has been reached, but there was no certainty it would ultimately do so.

“Couche-Tard continues to view Caltex as a strong strategic fit for its business, continues to view Caltex as an important potential component of its Asia-Pacific strategy and there are considerable opportunities to be extracted through a combination,” Caltex said.

Britain’s EG also lobbed a cash and share takeover proposal which was rejected for undervaluing the company.

The challenge for the business was underlined in a separate first-quarter trading update issued on Monday, which showed an $18m loss for its Lytton refinery in Brisbane for the three months to March 31 from a $5m profit a year earlier.

Fuels and infrastructure earnings before interest and tax dived to $53m, from $109m, but convenience retail jumped to $102m from a low base of $40m a year ago. Overall net profit fell to $80m from $94m.

Caltex said falls in fuel demand are now expected at the top end of previous forecasts.