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Woolworths Group Ltd (ASX:WOW) creates new alliance with Caltex Australia Limited (ASX:CTX)

Woolworths Group Ltd (ASX: WOW) has announced that it has entered into a new alliance with Caltex Australia Limited (ASX: CTX).

Readers may remember that Woolworths was looking to offload its petrol business to BP, but that fell through.

The new alliance will increase the number of fuel sites where Woolworths customers can redeem the fuel discounts and earn Woolworths Rewards points. It will also expand Woolworths’ Metro convenience footprint and lock in a competitive fuel price for the Woolworths Petrol business for the future too.

As part of the deal, there will be an additional 125 new Caltex sites where the Woolworths four cent discount can be used, adding to the current 104 Caltex sites.

Woolworths has also entered into a long-term wholesale food supply arrange to over 700 existing Caltex sites. Woolworths and Caltex will roll-out Woolworths Metro to up to 250 Caltex sites over the next six years, with 50 sites planned over the next two years. These sites will be operated by Caltex.

The fuel arrangement is a 15-year whole fuel supply agreement at a good market price, which is expected to deliver a pre-tax benefit of more than $80 million per year to Woolworths. Caltex will also make a one-off payment of $50 million to Woolworths.

Woolworths Petrol will continue to be treated as a discontinued operation for accounting purposes because it is looking to pursue an IPO or sale of the Petrol business.

Brad Banducci, CEO of Woolworths, said “While we were disappointed with the termination of the BP agreement, we believe the customer benefits of our alliance with Caltex, combined with a new fuel supply agreement will allow us to deliver a compelling outcome for both our customers and our shareholders.

“Customers will have access to an extended redemption and loyalty network and an exciting new convenience food format. The Woolworths Petrol business is in a good position to pursue its own growth agenda supported by a highly competitive fuel supply agreement and a strengthened management team, all underpinned by solid links to the Woolworths food business.”

Is Woolworths or Caltex a buy?

Woolworths seems to be getting the better deal out of this arrangement. $80 million per year plus a $50 million payment seems like a nice amount for simply continuing (and expanding) the current arrangement. Woolworths should also get a lot more convenience sales.

However, Caltex is in a better position now than it would have been if BP got control of the Woolworths Petrol business.

I don’t think this arrangement alone turns into either business a buy, but Woolworths is worth a little more now than it was before. However, I wouldn’t want to buy Woolworths shares because I’m bearish on most supermarket businesses. Also, it’s trading at 22x FY19’s estimated earnings with only small organic growth potential.

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Motley Fool contributor Tristan Harrison has no position in any of the 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 Scott Phillips.

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