Woolworths Limited (ASX: WOW) has today announced the sale of its fuel business which would generate nearly $1.8 billion in proceeds. The Woolworths share price rose as much as 3.1% as a result, and was trading 2.5% higher at the time of writing.
Woolworths said it had entered into binding agreements to sell its 527 Woolworths-owned fuel convenience sites, as well as 16 committed development sites, to BP for $1.785 billion.
In order for the deal to proceed, BP will still need to obtain approval from both the Australian Competition and Consumer Commission (ACCC) and the Foreign Investment Review Board (FIRB). Woolworths doesn't expect the transaction to be completed until at least January 2018.
Impact on Caltex Australia
Shares of Caltex Australia Limited (ASX: CTX) fell 1.4% following the news. As it had previously mentioned, Caltex had made a conditional and confidential proposal to Woolworths to acquire its fuels business and continue the successful fuel alliance (notably, Caltex's fuel supply arrangement with Woolworths is linked to Woolworths' ownership of the business), however, in the interests of shareholders, it was not willing to overpay for the business.
Caltex's will continue to pursue adjacent business opportunities and will update the market following notice of any change of the arrangement with Woolworths.
Fuel Offer
Of course, many consumers will be wondering what this deal means for Woolworths' generous fuel offer which has traditionally scratched 4 cents per litre off of fuel purchases after the customer spends a certain amount in Woolworths' supermarkets.
Firstly, Woolworths said that, until BP gains the necessary approvals from the ACCC and FIRB, there would be no changes to its existing fuel offer. Second, Woolworths also noted it would enter into a long-term strategic partnership with BP which would include the preservation of Woolworths' 4 cents per litre fuel redemption offer for a minimum 10-year period (the two companies would equally fund the fuel discount).
While keeping the offer at the 527 Woolworths fuel and convenience sites, BP will also expand the offer to additional BP sites, increasing the redemption fuel coverage. "As a result, ~80% of Woolworths supermarkets are expected to have a fuel redemption site in close proximity for their customers, up from the current 75%".
Over time, the partnership would also aim to increase convenience for Woolworths customers by improving the offerings from BP stores (many of which would offer the fuel discount) while it is also proposed that BP will become a cornerstone partner in the Woolworths Rewards program, which features Qantas Frequent Flyer points. In turn, this could help boost customer loyalty to Woolworths' stores.
Rationale
In the announcement, Woolworths' CEO, Mr Brad Banducci, said "Once regulatory approval is obtained, our Strategic Partnership with BP means we will not need to own petrol assets to offer our customers their 4cpl petrol discount and to expand our Woolworths Rewards program. Importantly this partnership will enable us to jointly roll-out a new, world-class fuel and convenience food offering that replicates BP's successful partnership with Marks & Spencer in the UK."
Woolworths said the sale of the Fuel business, which reported sales of more than $4.6 billion in the 2016 financial year, is not expected to have a material impact on its earnings. While it generated $117.8 million in earnings before interest and tax (EBIT) in FY16, some costs will remain with Woolworths after the transaction is completed, although it plans to minimise the impact of those costs going forward.
While this appears to be a good deal for consumers, Woolworths will also generate almost $1.8 billion in proceeds. It intends to use these proceeds to strengthen the Woolworths balance sheet and reinvest in its core businesses, including its supermarket stores.
Indeed, these have struggled in recent times against the likes of Coles, owned by rival Wesfarmers Ltd (ASX: WES), as well as Aldi. With the rumoured arrival of German discount supermarket Lidl, as well as US retail giant Amazon.com, it is imperative that Woolworths focus on strengthening its core businesses.
Foolish Takeaway
Woolworths and BP are not guaranteed to be granted approval by the ACCC, which has already expressed concerns regarding competition within the retail fuel sector. Meanwhile, although Woolworths' core supermarkets business does appear to be improving, it still may be too early to invest in the business.
