WELLINGTON: Z Energy shares have soared 21 per cent today after the news it has signed a $785 million agreement to acquire Chevron New Zealand’s Caltex service station network.
The strong market reaction to the announcement has added $436 million to the NZX listed company’s market capitalisation. At 3pm the shares were trading at $6.18c, up $1.08. The acquisition is subject to approval by the Overseas Investment Office and Commerce Commission, which is expected to take a few months. The deal is expected to be “earnings-accretive” from day one, adding 34 percent to earnings per share before counting anticipated synergy benefits of between $15 million and $25 million a year starting in 2017.
Z Energy chief executive 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 ran distinctively different business models, with Z concentrating on a “full service” offering, including food, coffee and car washes while Caltex was more focused on fuel sales, including having a “much better” truck stop operation than Z’s.
“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 percent 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, which is exiting the downstream oil and gas industry in New Zealand at the same time as it has invested for the first time in upstream activity, taking a stake in a deep sea exploration area off the Wairarapa coast last year.
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 2015/16 year from Z would give the combined company earnings RC Ebitdaf of $387 million, an increase of 52 percent on Z’s 2014/15 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. Chief executive Bennetts said the acquisition was a major opportunity for Z’s development.
“The acquisition is also a great fit with our longer term market growth strategy,” Bennetts said. “Caltex is a successful and highly attractive business in New Zealand and the acquisition means we can use the scale of the combined operation for the expanded supply of biodiesel to a broader market.”
Grant Williamson, of sharebrokers Hamilton Hindin Greene, said the acquisition was great news for Z shareholders, particularly the company’s indication that it would be earnings-positive from day one.
“From the presentation we’ve seen it looks extremely good and a very nice add-on to Z’s current business,” he said. “With the synergies that the two businesses can gain, in the longer term, it should be extremely positive for Z.” Bennetts said Z would not rebrand Caltex under its own brand. Caltex would remain a “differentiated offer”, he said.
News of the acquisition follows Chevron’s sale last week of its 11.4 per cent stake in the Marsden Point oil refinery, which fueled speculation that the company may also look to offload its service station operations in New Zealand. In addition to a $185 million pro rata capital raising, Z said it would fund the purchase with $80 million in existing cash and $540 million in additional debt facilities.
The Shell assets were rebranded as Z in 2012 and floated on the stock exchange the following year. Z had $206 million cash-on-hand and net debt of $224 million at the end of March. Chevron NZ reported a net profit of $43 million from gross operating revenue of $2.2 billion last year.
