Partnership with BP: Woolworths Limited (ASX: WOW) reported that they are selling their fuel business and has made a Strategic Partnership with BP in that regard. With this partnership, both the parties will equally fund the continuation of the 4 cents per litre (cpl) fuel discount for a minimum 10-year period. BP will maintain the 4 cpl fuel discount offer at the current 527 Woolworths fuel and convenience sites, and expand to other BP sites. This move is expected to lead to expanded fuel redemption coverage. Eventually, 80% of WOW’s supermarkets will then have a fuel redemption site in proximity as compared to present coverage of 75%. Both the parties also intend to develop a new “Metro at BP” format after the pilot is successful. There will be a refurbishment of up to 200 BP convenience stores in the “Metro at BP” format benefitting Woolworths customers. With BP as a partner, Woolworth’s customers could earn Reward Points on both fuel as well as in-store purchases. Both the parties are now waiting for an approval from the Australian Competition and Consumer Commission (ACCC) and Foreign Investment Review Board (FIRB). Completion of the transaction is expected in early 2018. WOW stock rallied over 7.99% in the last four weeks and generated over 15.4% in the last six months (as of January 06, 2017).
Financial implications of the transaction: Woolworths reported that their Fuel business sale would not impact the overall financial performance. The division had reported for $4,611.8 million in revenue during FY16 and an EBIT before significant items of $117.8 million which comprised overhead and other costs. This division EBIT also comprised cost of funding of the entire 4 cpl fuel discount offer of about $70 million (excluding GST) in FY16; and post the deal, WOW would equally fund the 4cpl fuel discount offer with BP. Operating lease rental expense for WOW’s Fuel Business was $70 million as of FY16.
Transaction impact on WOW and Caltex: WOW is to receive about$1.8 billion for its fuel division from BP. With these funds, WOW would further be able to invest in their core supermarkets business, which is facing tough competition from its peers. On the other hand, Caltex Australia Limited (ASX: CTX) stock fell towards end of December 2016 after the BP deal announcement as CTX had also demonstrated interests in WOW’s fuel business. But after the BP-WOW deal, Caltex Australia management reported that they would continue to pursue adjacent business opportunities, while make investments to enhance their business. On the other hand, it will be prudent to see how the above strategic move will help the supermarket chain reverse to healthier fortunes.
Disclaimer
The advice given by Kalkine Pty Ltd and provided on this website is general information only and it does not take into account your investment objectives, financial situation or needs. You should therefore consider whether the advice is appropriate to your investment objectives, financial situation and needs before acting upon it. You should seek advice from a financial adviser, stockbroker or other professional (including taxation and legal advice) as necessary before acting on any advice. Not all investments are appropriate for all people. Kalkine.com.au and associated pages are published by Kalkine Pty Ltd ABN 34 154 808 312 (Australian Financial Services License Number 425376). The information on this website has been prepared from a wide variety of sources, which Kalkine Pty Ltd, to the best of its knowledge and belief, considers accurate. You should make your own enquiries about any investments and we strongly suggest you seek advice before acting upon any recommendation. Kalkine Pty Ltd has made every effort to ensure the reliability of information contained in its newsletters and websites. All information represents our views at the date of publication and may change without notice. To the extent permitted by law, Kalkine Pty Ltd excludes all liability for any loss or damage arising from the use of this website and any information published (including any indirect or consequential loss, any data loss or data corruption). If the law prohibits this exclusion, Kalkine Pty Ltd hereby limits its liability, to the extent permitted by law to the resupply of services. There may be a product disclosure statement or other offer document for the securities and financial products we write about in Kalkine Reports. You should obtain a copy of the product disclosure statement or offer document before making any decision about whether to acquire the security or product. The link to our Terms & Conditions has been provided please go through them and also have a read of the Financial Services Guide. On the date of publishing this report (mentioned on the website), employees and/or associates of Kalkine Pty Ltd currently hold positions in: BHP, BKY, KCN, PDN, and RIO. These stocks can change any time and readers of the reports should not consider these stocks as advice or recommendations.