Caltex in disarray as Canadian suitor lobs $8.6b offer
Caltex Australia’s plans for a spin-off of petrol station sites have been thrown into doubt after just 24 hours as it was forced to disclose an $8.6 billion all-cash takeover approach from acquisitive Canadian convenience retailer Alimentation Couche-Tard.
The interest from the giant Toronto-listed company is at $34.50 a share, which has raised its offer 7.8 per cent since it made its first approach on October 11, first revealed in The Australian Financial Review’s Street Talk column, forcing Caltex to go public.
It has cemented suspicions in the market that the service station IPO was a defensive tactic by Caltex, which has been under pressure to unlock value from its portfolio, including its $834 million pile of franking credits.
“I suspect they had a whiff that they had a stalker, and your first line of defence when it comes to protecting your business from a takeover? Increase your financial leverage, which is what the property IPO will help,” said Jason Teh, a portfolio manager at Vertium Asset Management.
“At least that way you can extract greater returns for existing equity holders before somebody extracts them.”
The petrol and convenience retailer only on Monday revealed a plan to spin off some of its service station sites in an IPO, a move that its suitor, owner of the Circle K brand well known in Asia, said wouldn’t be possible under the conditions of its offer.
Couche-Tard, French for “night owl”, already owns about 2 per cent of Caltex. Its offer involves a proposal for Caltex to pay a fully franked special dividend of up to $8.41 per share to allow the franking credits to be distributed to shareholders. That would increase the value of the offer by as much as $3.61 per share for some shareholders depending on their situation. It is also proposing an alternative option where Caltex shareholders could choose to be part of a buyback of their shares.
Chief executive Brian Hannasch described the offer as “very compelling” for Caltex shareholders. He underlined that Couche-Tard is a “committed buyer” of the entire business, challenging a view in the Australian market that it may not want to keep Caltex’s Lytton refinery in Brisbane.
“With Caltex, we see a potential opportunity to leverage our leading global position in the convenience retail market, and we would seek to bring all our operating expertise to bear to help support and grow the Caltex business,” Mr Hannasch said.
“We are willing and prepared to engage with Caltex to enable our proposal to be put to Caltex shareholders as soon as possible.”
The conditional offer represents a premium of 15.8 per cent over Caltex’s closing share price on Monday and compares with an initial approach on October 11 at $32 per share. That offer, which represented a premium of about 25 per cent at the time, was rejected as inadequate.
Shares in Caltex surged 13.4 per cent to $33.79 on Tuesday.
Couche-Tard, which has made 60 acquisitions and deals since 2004, operates in 27 countries, selling 43 million gallons of fuel and about 750,000 cups of coffee a day.
More than 2150 stores operate under its Circle K brand outside North America and Europe, in places including New Zealand, Cambodia, Hong Kong and Saudi Arabia.
Couche-Tard, which invested this year in a cannabis retailer in Canada, has for months been circling potential targets in Australia’s fuel sector, including the Woolworths petrol station business that was eventually sold to UK-based EG Group.
RBC Capital Markets analyst Ben Wilson said that Couche-Tard, which has a market cap of about $52 billion, could look to divest some or all of Caltex’s fuels and infrastructure business, while adding that “a significant portion of Caltex’s appeal is in its integrated model”.
Caltex, which is being advised by UBS and Grant Samuel, said the talks with the Canadian group over its “highly conditional” offer were at a preliminary stage and there was no certainty of any deal.
“The Caltex board is focused on maximising shareholder value and will carefully consider any proposal that is consistent with this objective,” it added.
The public outing of the proposals comes a day after Caltex announced it would unlock value with an initial public offering of up to 49 per cent of 250 freehold petrol stations. It is understood not to have intended to disclose the takeover approach until confidentiality was lost.
Caltex said the announcement of the IPO, which has been months in the works and is the result of a review of its retail sites announced in August, “is not related” to the Couche-Tard approach.
However, the fuels company has been under increasing pressure to unlock value that was not being recognised in the market after rejecting last year a more significant demerger or spin-off.
Airlie Funds Management senior analyst Terry Couper said Caltex had been ”undervalued for years”.
“We’re pleased to see the board engaging to unlock that value. However, the current bid price fails to fully capture the privileged position of the fuel infrastructure assets and the retail property,” he said.
Still, Vertium’s Mr Teh, who is not a holder of Caltex stock, described the price as “full”, representing a price-earnings multiple of 18 times based on the current share price, a level not seen in such a sector since late 2014. The offer values Caltex at about $10 billion including debt.
Couche-Tard’s proposal is subject to several conditions, including due diligence and a unanimous recommendation by the Caltex board, as well as foreign investment approvals.
Caltex is already in a state of flux with chief executive Julian Segal advising in August that he would be stepping down after 10 years at the helm. A successor has yet to be announced.
Neither Mr Segal nor Caltex chief financial officer Matt Halliday would comment on Tuesday but are due to update investors at an annual briefing next week.
Extracted from AFR