Analysts at investment bank UBS have described Viva Energy’s $1.15bn acquisition of the On The Run Group as transformational, but are wary that competition risks await.
The acquisition of the convenience store business announced last week can add $165m of earnings before interest, tax, depreciation and amortisation, UBS said, and diversifies Viva Energy’s earnings into convenience retail with non-fuel earnings lifting from 30 per cent to 50 per cent of Viva’s gross profit after completion.
“We believe the deal de-risks and improves the potential upside from the Coles Express acquisition by capturing the brand rights and capability of the highly regarded OTR team.”
As well as the $60m of synergies identified, they believe there is considerable upside from yet-to-be-quantified synergies if Viva can capture some of the upside from OTR’s format, which generates stronger sales per store.
These are currently on average about 2.5 times higher than Coles Express.
“We model strong earnings per share and free cash flow per share accretion can be achieved once synergies are realised, but remain somewhat cautious that genuine Australian Competition and Consumer Commission challenges await.”
UBS analysts expect Viva can achieve 8 per cent EPS accretion from 2026 following $60m of synergies being realised.
“Our upside scenario sees EPS accretion of greater than 20 per cent by 2027.”
UBS says this is assuming Viva Energy converts 150-200 of existing sites to the OTR format over 3 years and can capture just half the earnings uplift per store differential that currently exists between OTR and Coles Express.
“We expect Viva Energy can continue to payout 70 per cent of earnings providing a 6-7 per cent dividend yield and once synergies are achieved, we expect net debt to EBITDA would remain below the bottom end of its 1-1.5x target range.”
UBS said it anticipated the proposed transaction would require formal ACCC authorisation, given how focused the ACCC remain on competitive dynamics in retail fuel markets.
The analysts said combining OTR’s 160-odd integrated fuel and convenience stores in South Australia with Viva’s 43 Coles Express sites (ex Liberty sites) may raise market concentration concerns, given their analysis indicated it could provide more than 50 per cent market share in Adelaide.
UBS also draws upon ACCC data to set out how it might assess the extent to which Viva Energy could extract pricing power, by indicating cases where Coles Express and OTR both on average offered retail fuel prices higher than the average market price in Adelaide.
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