A cashed-up Caltex Australia Limited (ASX: CTX) could be mulling over a potential acquisition of Woolworths Limited's (ASX: WOW) petrol joint venture, with Sky News even reporting a 'plan' is underway to do so.
Based on estimates provided by the Fairfax press, Caltex, which is Australia's leading supplier of transport fuels, has roughly $600 million in cash that it could allocate to acquisitions. While there have been some suggestions the company could look to acquire British Petroleum's (BP's) local assets, it would make more sense if the company targeted its joint venture partner.
So What: A negligible amount of Woolworths' earnings before interest and tax (EBIT) came from its petrol division in the latest financial year. While it mightn't have a huge direct impact on earnings however, it does play a strategic role in driving customers towards its core grocery business via discount fuel offers.
If Woolworths was to sell the business, it seems likely that it would want to retain the supermarket bundle agreements with Caltex so as to not risk losing any more customers to Coles and Aldi.
Indeed, many analysts believe that one of the best ways for Woolworths to resolve its recent issues would be to simplify its business and free up some cash. It would also allow Woolworths to focus on its struggling food and liquor division, which generated the majority of group earnings in the 2015 financial year.
Of course, Caltex will also need to consider the potential regulatory issues any acquisition may create. To begin with, Caltex was blocked by the Australian Competition and Consumer Commission in 2009 when it tried to buy a suite of service stations owned by Mobil. Similar issues could arise if it tried to buy BP's local assets while the ACCC could even raise the red flag if it wanted to buy out Woolworths.
Now What: Right now, Woolworths' top priority is to find a new CEO to replace the outgoing Grant O'Brien while it is also desperate to turn its struggling food division around. As such, a deal with Caltex mightn't be at the top of its to-do list, but it could come up in the new chairman's (Gordon Cairns) review into Woolworths' operations.
