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Why Viva Energy shares shot higher but Coles shares sank lower today

Source: Viva Energy

The Viva Energy Group Ltd (ASX: VEA) share price has been one of the best performers on the local market on Wednesday.

At the time of writing the fuel retailer’s shares are up 12% to $2.16.

Why is the Viva Energy share price shooting higher?

Investors have been fighting to get hold of Viva Energy’s shares after supermarket giant Coles Group Ltd (ASX: COL) announced that it has entered into an agreement to restructure the terms of the Fuel and Convenience Alliance with it. Coles also advised that both parties have agreed to extend the Alliance until 2029.

According to the release, the new alliance is expected to “deliver a more competitive customer offer, provide an opportunity to expand the network and better align contributions and incentives for each party to jointly grow the business going forward.”

It will also allow each party to leverage their core competencies, together in a competitive, integrated offering.

What else has changed?

Coles will now receive a commission per litre from Viva Energy based on fuel volumes achieved, whereas Viva Energy will be responsible for setting the retail price of fuel and receive the retail fuel margin. This means that Coles will no longer have direct exposure to retail fuel price movements.

Viva Energy will pay Coles $137 million at transaction close and a payment for net working capital upon expiry or early termination of the alliance.

Coles CEO, Steven Cain, believes the new agreement is compelling.

He said: “We believe the benefits of the New Agreement are compelling for all customers, team members and shareholders. We look forward to jointly working with Viva Energy to re-establishing the Alliance as Australia’s leading petrol and convenience retailer.”

Viva Energy’s CEO, Scott Wyatt, was equally pleased with the news.

Mr Wyatt said: “Today’s announcement signals a significant step forward in our long-standing Alliance with Coles Express. Together, we represent Australia’s leading fuel and convenience offer and we look forward to growing the Alliance with Coles Express in the years to come. I am excited by the benefits these new arrangements will enable us to deliver for both our customers and our shareholders.”

I agree with this view and feel both companies could be worth considering as investments.

Why is the Coles share price lower?

While this news was a positive, it has been offset by a weak trading update.

According to the release, trading conditions in the Convenience division have remained challenging due to the ongoing impact of previous changes of commercial terms in the alliance, higher global oil prices, and a lower Australian dollar.

As a result, the Coles Convenience division is expected to report first half EBIT in the range of $47 million to $51 million. This will be a significant decline on the $82 million generated in the prior corresponding period.

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Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of COLESGROUP DEF SET. 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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