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December 6, 2019

Volume 7 Issue 4

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Caltex Australia Rejects Takeover Bid

Caltex Australia, one of Australia’s biggest lubricants and grease suppliers, rejected an unsolicited A$8.6 billion (U.S. $5.8 billion) takeover bid from Alimentation Couche-Tard last week, but left the door open for further offers from the Canadian convenience store operator.

Caltex owns more than 250 fuel and retail outlets in Australia. Caltex is the brand name and the licensee for Chevron products in Australia, including refined fuels and lubricants. Chevron sold its 50 percent stake in Caltex Australia in 2015.

Shortly afterwards, Caltex broke up with BP Australia, dissolving a 15-year lubricant blending joint venture known as Australian Lubricant Manufacturing Co., which held around half of Australia’s lubricant and grease market and was valued at nearly A$2 billion.

After the split, Caltex retained a blending plant and base oil storage facility at Lytton in Brisbane as its home base for lubricants and grease in Australia. It also has distribution and warehousing facilities throughout the country in Sydney, Melbourne and Perth.

Caltex publicly announced the takeover bid on Nov. 26, after which Couche-Tard disclosed it made an original bid on Oct. 11 for 100 percent of Caltex at a valuation of A$32 per ordinary share in Caltex. It then made a second bid on Nov. 18, which increased the valuation to A$34.50 per share.

On Dec. 3, Caltex announced it had rejected the most recent proposal for undervaluing the company, but that it would provide Couche-Tard with non-public information to allow the Canadian company to submit yet another bid.

“We have yet to hear back from them,” Caltex Australia Chairman Steven Gregg said at a meeting of Caltex investors on Dec. 5, adding that he expected to hear from Couche-Tard soon. “I know these people very well … we understand exactly what is going on with the offers. If they want to buy Caltex they’ll have to pay proper value.”

Caltex Chief Financial Officer Simon Hepworth, speaking at the same meeting, said the Couche-Tard bid was priced at a 16 percent premium to the share price on Nov. 17, the eve of the second offer. He described the bid as “opportunistic,” coming as the Caltex share price hovered near a three-year low.

Couche-Tard has expanded rapidly in recent years to 16,000 stores in North America, Europe and Asia. Its store brands include Circle-K.

The company said in November that it saw in Caltex Australia an opportunity to leverage its leading position in the global convenience retail market. It doesn’t presently own any operations in Australia, nor does it own any lube assets.

Meanwhile, Caltex is in the midst of a revamp of its retail service station network, including identifying certain stores for increased fresh food and grocery lines, and others for fast and convenience food. The company said it sees an A$85 million boost in non-fuel earnings from changes to how it operates and merchandises its convenience stores.

Caltex said in a statement to the Australian Stock Exchange on Dec. 3 that it had agreed to sell 25 properties for A$136 million, including A$80 million of which it had already exchanged. These properties had been flagged as underperforming in a review of the retail network. Another 25 properties are slated for sale.

The company also reiterated plans for an initial public offering of 49 percent of a real estate investment trust comprising 250 of Caltex wholly owned service station sites. Couche-Tard earlier said its bid was conditional on Caltex not proceeding with the IPO.

Cost-cutting initiatives across fuel and infrastructure operations will save another A$100 million, said Hepworth. He said cost savings in 2020 will come particularly from lubricant packaging and freight forwarding.

In response to an investor asking why the company needed to own retail to maximize value from Caltex’s core fuel and lubes business, Caltex CEO Julian Segal suggested it didn’t. “We’re not wedded to any particular business model,” he said. “There’s no issue to us changing to a different business model once we understand how a different model can create value,” for shareholders.

Another investor commented that Couche-Tard doesn’t have credibility in the fuel and lubricants space, and asked if there was any merit in suggestions of a breakup of the assets between retail operations and the more earnings-rich fuel and lubricants operations.

“We see considerable upside to unlocking value with our strategy,” Caltex responded.

As of yesterday, Couche-Tard hadn’t made a public response to Caltex’s invitation to inspect company documents.