Woolworths sells petrol station business to BP for $1.78bn

Woolworths has more cash to fight Coles after a deal with BP that keeps fuel discounts and widens its loyalty scheme.

A Woolworths-owned petrol station.

Woolworths chief executive Brad Banducci’s strategy to rid the underperforming retailer of its unwanted assets and transform the company into a pure-play supermarket has taken a great leap forward with a deal to sell its petrol station business to BP for $1.78 billion.

As part of the deal with BP, Woolworths will expand its loyalty program and plans to roll out up to 200 new convenience stores.

While still protecting his customers with promises of a “long-term strategic partnership’’ with BP that aims to continue fuel discounts to his supermarket customers, Mr Banducci has realised billions of dollars in fresh cash from the sale that will help him improve the retailer’s competitiveness and take the fight up to archrival Coles.

Woolworths shares rose 2 per cent in early trade after news of the deal.

The sale comes at a crucial time for Woolworths (WOW) as it stares down a superior customer offer from Coles and further incursions from German retailer Aldi.

Helping to fuel its renewed competitiveness and focus management on the task of turning around its struggling supermarkets, Woolworths has already sold off its failed Masters hardware chain and has announced its intention to sell its online retail business Ezibuy, with speculation growing it might also shed its loss-making Big W arm this year.

The sale of the petrol station business will free up capital as well as management, allowing Mr Banducci to throw more investment of both capital and labour at his flagship supermarkets.

Woolworths has already invested more than $1 billion in lowering prices at its supermarket group with the realisation of nearly $1.8 billion from today’s sale of its petrol station business giving it more room to push down prices even further.

Already that strategy seems to be paying off.

Woolworths is starting to catch up to Coles, with recent quarterly data showing Coles’ sales momentum slowing by nearly half, while Woolworths beat analyst expectations with an acceleration of its sales momentum.

Offloaded to BP will be 527 Woolworths-owned fuel convenience sites and 16 development sites.

Woolworths says under the deal it and BP will equally fund the continuation of the 4c per litre fuel discount for a minimum of 10 years, with the discount expanded to other BP sites.

“As a result, 80 per cent of Wooloworths supermarkets are expected to have a fuel redemption site in close proximity for their customers, up from the current 75 per cent,” Woolworths told the ASX.

Subject to a trial, the two companies also plan to roll out up to 200 upgraded convenience stores, called “Metro at BP”, while BP will also become part of an expanded Woolworths’ reward program.

Mr Banducci said the partnership would mean Woolworths having a larger platform for its redemption and reward program, as well as drawing on BP’s success with convenience food outlets.

“Following extensive evaluation of the proposals received, we decided that BP’s proposal met our strategic and broader commercial imperatives and in its entirety provided superior long-term shareholder value,” Mr Banducci said.

BP Australia President Andy Holmes said his company had already experienced success in similar strategic partnerships around the world, including with Marks & Spencer in the UK and REWE in Germany.

“This new partnership is great news for all Australian consumers, who will in future be able to enjoy the combination of BP’s premium fuels, a world class convenience food offer and an enhanced loyalty program,” Mr Holmes said.

The deal is expected to be completed by January 2, 2018, pending approval by the Australian Competition and Consumer Commission and Foreign Investment Review Board.

Woolworths’ existing Caltex co-branded sites will continue to operate in the interim.

Woolies’ deal with BP ends the ambitions of Caltex (CTX), which had made an offer to buy the Woolworths service stations. Its shares fell 2.4 per cent in early trade, later recovering to be 1.2 per cent down.

Caltex said today it is disappointed its fuel supply alliance with Woolworths will end. It believed

its bid for the Woolworths service stations business represented “full and fair value”, and the company had to exercise financial discipline in pursuing growth.

Caltex said its 3.5 billion litre wholesale fuel supply arrangement with Woolworths will remain in place until the BP deal is finalised.

Last week Caltex expanded across the Tasman for the first time, paying $324 million to buy the assets of Gull New Zealand.

Some analysts had speculated BP should make a bid for Caltex rather than pursue a deal with Woolworths because it would have gained access to import infrastructure and a distribution network, as well as more gas stations.

Woolworths said the sale was not expected to have a material impact on group earnings.

The Woolworths petrol station business has annual revenue of $4.6 billion and earned a pretax profit of $117 million last financial year.

Ratings agency Standard & Poor’s said in August that asset sales by Woolworths would help support an investment-grade credit rating, as it didn’t expect the retailer’s operating performance to improve markedly soon.

In October, Woolworths completed the sale of Australian home-improvement chain Home Timber & Hardware Group to Metcash for $165 million. Woolworths also ended a joint venture with Lowe’s to operate a chain of home-improvement stores after it struggled to make a profit.

For BP, the purchase is the latest move by the British oil company to rebuild following the deadly Deepwater Horizon disaster.

It adds to a BP retail footprint that already spans around 1400 sites in Australia. BP also owns the Kwinana oil refinery in Western Australia, and stakes in the active North West Shelf liquefied natural gas facility and proposed Browse gas-export venture.

It comes in a month when BP has already agreed to a near $US1 billion investment in a vast natural-gas field off the coast of Africa and a $US2.2 billion all-share deal for stake in a parcel of UAE. oilfields.

These deals suggest that BP is looking to expand after assessing the financial toll of the 2010 Gulf of Mexico well blowout that killed 11 people, caused an environmental disaster and forced the company to shrink significantly.

BP sold about $US50 billion in assets to help pay for the clean-up and legal costs that ultimately totalled more than $US60 billion, only to be hit by a sharp slump in oil prices that took hold two years ago and compounded the company’s financial woes. Its daily production shrank to 3.3 million barrels of oil equivalent a day in 2015, down from four million a day in 2009.

Still, BP’s decision to buy more Australian petrol stations marks a different approach to several large competitors, which have sold retail and marketing arms in Australia to focus on exploration and production businesses that they believe offer better returns.

In 2014, Royal Dutch Shell sold its Geelong refinery in southern Australia and its 870-site retail business, along with its bulk-fuels and chemicals businesses in Australia, to a unit of European energy trader Vitol Holdings. Four years earlier, Exxon Mobil sold nearly 300 petrol stations to 7-Eleven, which has a license to operate and franchise stores in Australia from US-based 7-Eleven Inc.

With Dow Jones