Could Woolworths Limited net $1.5 billion for its petrol stations?

Throughout 2014 and early 2015 I suggested the petrol retailing businesses as a weak area for both Wesfarmers Ltd (ASX: WES) and Woolworths Limited (ASX: WOW), with both businesses increasing their investment and ‘canopy’ (station) numbers at a time when overall fuel volumes were shrinking.

The network expansion appeared to be a result of each business attempting to checkmate the other, and use growing convenience sales to justify the investment. At the time I wrote that it appeared to be a heavy investment in a low growth area, and now Fairfax media has reported that Woolworths is considering divesting its petrol retailing arm.

Fairfax media reported today that executives from petroleum company BP were in Australia this week to weigh up an offer for Woolworths’ petrol canopies. BP reportedly controls approximately 10% of the Australian fuel retailing market, compared to Woolworths’ 21%. With the addition of Woolworths’ stations to the stable, BP would control around 31%, ahead of Wesfarmers with 21%, Caltex Australia Limited (ASX: CTX) with 17% and 7-Eleven with 6%.

But what about Caltex?

Caltex, Woolworths’ long-time petrol retailing partner, is the elephant in the room when it comes to a potential divestment of Woolworths’ petrol division. It is uncertain if Caltex has a priority claim on any Woolworths’ petrol divestment, but it would be reasonable to assume that Caltex is able to mount a strong bid given the long history between the two businesses. With gearing of just 13% and operating cash flows of over $800 million, a $1.5 billion acquisition appears within Caltex’s reach.

With Caltex switching towards becoming more of a petrol retailer in recent times, Woolworths’ petrol stations are arguably far more important to Caltex than they are to BP, and investors might see a bidding war if Woolies’ management decides to consider a divestment.

However, the Australian Competition and Consumer Commission (ACCC) might react negatively to a potential tie-up, depending on the potential impact on competition. The ACCC has been actively – though some may say ineffectually – involved in the sector for many years, and has used a number of enforceable undertakings to prevent anti-competitive behaviour.

From my perspective, I’d say a potential BP bid has a good chance of going ahead, given the existence of Wesfarmers’ Coles stations as a vigorous number two competitor. A Caltex deal may be a little harder to get across the line, since a tie-up there would give Caltex nearly 40% of the domestic market.

All of this is supposition on my part, with no bid having been reported yet. A sale could be an effective way of recycling capital for Woolworths’ management, which could then plough it back where it’s needed – into the under-performing supermarket and department store segments. Watch this space.

BRAND NEW! Our Top Dividend Stock for 2016

Our resident dividend expert names his Top Dividend Share for 2016. Not only are the shares dirt cheap, the company is trading on a 5.6% fully franked dividend yield. Simply click here to gain access to this comprehensive FREE investment report, including the name of this fast growing ASX dividend share. No credit card required!

Motley Fool contributor Sean O'Neill has no position in any stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

Two New Stock Picks Every Month!

Not to alarm you, but you’re about to miss a very important event! Chief Investment Advisor Scott Phillips and his team at Motley Fool Share Advisor are about to reveal their latest official stock recommendation. The premium “buy alert” will be unveiled to members and you can be among the first to act on the tip.

Don’t let this opportunity pass you by – this is your chance to get in early!

Simply enter your email now to find out how you can get instant access.

By clicking this button, you agree to our Terms of Service and Privacy Policy. We will use your email address only to keep you informed about updates to our website and about other products and services we think might interest you. You can unsubscribe from Take Stock at anytime. Please refer to our Financial Services Guide (FSG) for more information.