BP retreats from $1.8 billion deal for Woolworths Group Ltd’s (ASX:WOW) fuel business

Woolworths Group Ltd (ASX: WOW) announced on Thursday that it won’t proceed with the sale of its petrol business to BP.

The British oil major walked away from the deal, after the $1.8 billion acquisition of 527 Woolworths-owned fuel convenience sites announced at the end of 2016 met with the opposition of the Australian Competition and Consumer Commission (ACCC) in December last year.

The ACCC argued that Woolworths was a major player in retail fuel supply and the sale of its service stations to another heavyweight like BP would have significantly decreased competition in the market, removing downward pressure on retail fuel prices to the detriment of consumers.

BP already owns 350 stations in Australia, in addition to over 1,000 independently operated under the BP brand.

At the time, Woolworths expressed disappointment for the refusal, which had come after months of negotiations between them, BP and the regulator. Today’s update indicates that efforts to amend the deal in order to get ACCC’s approval failed. BP Australia said in a press release that the transaction couldn’t be structured to meet its strategic objectives.

Woolworths stated it would engage with alternative options for the petrol business, without specifying whether it is negotiating with other potential buyers, or considering a demerger. In the first half of FY18, the fuel segment accounted for 13% of the group’s $32 billion revenue, and just 6% of EBIT.

At the time of writing, shares in Woolworths are up 2% to a 52-week high of $30.

Another stock that gained on the back of the news is Caltex Australia Limited (ASX: CTX), which supplies fuel to Woolworths and would have lost one of its major clients if the deal had gone through. Shares in Caltex climbed 2% higher to $32.39.

Foolish takeaway

In 2016, Woolworths’ rationale for the deal with BP was to strengthen the balance sheet and focus on the core business. At the time, the company had net debt of $3.1 billion. At 31 December 2017, net debt had been reduced to $1 billion, and today the divestment of the petrol business doesn’t seem as urgent, which is probably why BP’s retreat didn’t weigh on market sentiment.

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