Caltex urges EG Group to sweeten cash bid

Caltex Australia has invited UK suitor EG Group to come up with more cash to sweeten its offer for the company.

Caltex is believed to have taken the view it is best placed to realise any benefits from the break-up of the company

Caltex Australia has invited UK suitor EG Group to come up with more cash to sweeten its offer for the company, underlying the old truism that cash is king in a falling market.

EG Group had offered $3.9bn in cash for Caltex’s Australian convenience store business, with the plan to spin out its Ampol fuel, refining and infrastructure assets into a new ASX-listed entity.

Caltex shareholders would receive $15.62 cash, plus shares in Ampol — with EG Group offering to pay cash for a 10 per cent stake in Ampol as well. Existing fuel-supply agreements with Caltex’s service stations would remain in place.

Even the promise of a bidding war for the Australian company hasn’t saved it from the market meltdown over the last week, and Caltex shares closed Monday trading well under the $35.25 a share on offer from Canada’s Alimentation Couche-Tard.

In the face of the certainty provided by the $8.8bn cash on offer from Couche-Tard, the Caltex board rejected the EG Group bid, albeit leaving the door open for a sweetened offer from its UK suitor.

$32 Caltex closed down 70¢ q

That is likely to need to occur without access to the same due diligence offered to Couche-Tard, with the Caltex’s board believed to have baulked at the prospect of giving a key rival — EG last year acquired Woolworths network of 540 fuel stations for $1.7bn — access to its books with only a conditional offer on the table.

EG has grown rapidly in Europe, the US and Australia, building a network of about 5000 fuel stations and convenience stores in a series of acquisitions capped by last year’s $1.7bn deal for Woolworth’s network.

That growth has been primarily fuelled by debt, with EG Group having global debts worth about £7.3bn ($13.9bn), according to Bloomberg.

Its offer for Caltex is also conditional on the establishment of further lines of debt to fund the acquisition, further clouding the bid in light of current market uncertainty as retailers across the globe ponder the impact of the coronavirus on both their supply chains and on customer behaviour.

Caltex is also believed to have taken the view it is best placed to realise any benefits from the break-up of the company, given it had already floated a proposal to spin off the property underlying 250 of its service stations into a real estate trust late last year, before the bidding war for the company broke out.

RBC Capital Markets analyst Ben Wilson said the EG bid fell beneath his valuation of the service station assets, suggesting a cash offer of $17 a share would be closer to the mark.

While the Couche Tard offer will drop following Caltex’s decision to pay a 51c a share dividend, he said, the Canadian suitor remains in the box seat for an agreed takeover.

“We would note, though, that this likely reduces the likelihood of a further Couche bid absent any further proposals from EG or other competitors,” he said.

Any revised EG Group will also face close scrutiny from competition regulators, given Australian Competition & Consumer Commission is keeping a close eye on the sector.

Two years ago the ACCC blocked a bid by BP to take control of Woolworth’s fuel store chain, a decision that cleared the way for EG to enter Australia. It examined, but did not intervene, in Viva Energy’s offer to mop up the wholesale arm of Liberty Oil last year.

Caltex shares closed down 70c at $32 on Monday.