Food Over Fuel

Woolworths has announced the much-anticipated sale of its petrol business to European and North American convenience and fuel retailer EG Group for $1.725bn. EG Group is a European and North American convenience and fuel retailer that operates across 4,700 sites with partnerships with global fuel (Esso, BP, Shell), supermarket (Carrefour, SPAR) and quick-service restaurant (KFC, Starbucks) brands.

 

Woolworths and EG have entered into a 15-year commercial alliance that includes: 1) continuation of the 4c shopper docket offer for Woolworths Food customers; 2) continuation of the Rewards offer for fuel and convenience purchases at these sites; and 3) a new wholesale supply agreement enabling competitive sourcing for EG and providing distribution for Woolworths products.

 

EG will rebrand the sites from Woolworths, although the price board is expected to include the new brand, Caltex (fuel supplier), Woolworths (docket redemption) and any other offer EG may wish to provide at specific sites.

 

We derive a pro-forma FY19E enterprise value to operating earnings transaction multiple of 6.8x, in line with or above recent similar transactions, and so we see this acquisition as EPS-dilutive. There is little tax to be paid on the sale due to carried-forward losses from its now-closed hardware business, and so proceeds from the acquisition are expected to be used in capital management, which should moderate forecast EPS dilution.

 

Woolworths has a track record for returning franking credits to shareholders, with a fully franked special dividend of 10cps declared with its final FY18 dividend. The structure of future capital management is expected to be in the form of either a special dividend or an off-market buyback, with both designed to redistribute some of its $2.6bn (as at the end of FY18) franking credits to shareholders.

 

We see this divestment as further evidence of Woolworths’ focus on its core food business. Our earnings estimates for Woolworths remain unchanged at this time as the acquisition is subject to Foreign Investment Review Board approval. We maintain our Hold recommendation and our $30.00 target price.

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