Z Energy shares have spiked 22 per cent after the news it signed a $785 million agreement to acquire Chevron New Zealand’s Caltex service station network. It will raise $185 million in new capital from shareholders that will go towards funding the purchase.
The strong market reaction to the announcement has added $436 million to the NZX listed company’s market capitalisation.
The acquisition is subject to approval by the Overseas Investment Office and Commerce Commission, which is expected to take a few months.
“Z Energy being up 20 per cent on the back of this deal it had lined up with Caltex certainly has put a lot of support under our market,” said Paul Harrison, head of equities at Salt Funds Management.
“If they can get it through the Commerce Commission there appears to be significant upside in the earnings. It certainly appears to be earnings accretive, so it’s good news for shareholders if they can complete the deal.”
The deal is expected to be “earnings-accretive” from day one, adding 34 per cent to earnings per share before counting anticipated synergy benefits of between $15 million and $25 million a year starting in 2017.
Z Energy CEO, Mike Bennetts, insisted at a briefing that the decision not to change the Caltex and Challenge! petrol brands to Z was not simply to give the regulator assurance that the domestic transport fuels market would remain competitive if Z was allowed to complete the transaction.
The two companies run distinctively different business models, with Z concentrating on a full service offering, including food, coffee and car washes, while Caltex is more focused on fuel sales.
“We would destroy the value (in Caltex) by turning it into Z,” said Bennetts, who noted that Caltex’s rates of return were stronger than Z’s, although the company had chosen not to make much capital investment in its network in recent years.
Z claims 28 per cent of the transport fuels market against Caltex/Challenge!’s 21 percent. An average Z service station sells 5.3 million litres of petrol and diesel annually, compared with an average 4.3 million at Caltex and Challenge! sites.
The Commerce Commission application included a study of the existing level of overlap between the two chains’ retail sites within both a two kilometre and five kilometre radius. All existing Caltex staff have been guaranteed employment for the first 12 months of the merger.
Z has rights to the Caltex brand for two years. Challenge! petrol stations are owned by the Farmlands co-operative group, with the franchise licenced from Chevron NZ.
The purchase price equates to 5.9 times estimated replacement cost earnings before interest, tax, depreciation, amortisation and financial instrument value changes, Z’s preferred earnings measure.
Caltex turned over $2.24 billion last year, around 75 per cent of Z’s turnover, and reported RC Ebitdaf of $132 million, some 54 per cent of Z’s.
A pro forma combination based on Caltex’s 2014 results and guidance for the 2015 and 2016 year from Z would give the combined company earnings RC Ebitdaf of $387 million, an increase of 52 per cent on Z’s 2014 and 2015 result before synergies.
Chevron New Zealand operates 147 Caltex service stations and 73 truck filling sites in New Zealand.
Z already has more than 200 stations and close to 100 truck filling sites according to its website.
