The Viva Energy Group Ltd (ASX: VEA) share price has climbed to a new multi-year high on Wednesday morning.
At the time of writing, the ASX 200 fuel retailer's shares are up 5% to $3.24.
Image source: Getty Images
Why is the Viva Energy share price scaling new heights?
Investors have been bidding the Viva Energy share price higher today after the company announced a major acquisition.
According to the release, the company has entered into a binding agreement to acquire the OTR Group from Peregrine Corporation for a total consideration of $1.15 billion. Based on estimated earnings and synergies, this represents a 7x EBITDA multiple.
The release notes that the $1.15 billion consideration will be funded through $1 billion of debt and working capital, and an equity component of $150 million to be issued to the sellers.
The deal is expected to deliver earnings per share accretion of 6% on a pro forma FY 2022 basis and 11% on a normalised FY 2022 basis.
What is OTR?
OTR, also known as On the Run, is a leading independent convenience retailer in Australia, generating more than $3 billion of revenue annually and employing approximately 6,500 people.
It comprises OTR Convenience Retail, Smokemart and Giftbox (SMGB), and Mogas Regional and Reliable Petroleum.
The OTR Convenience Retail business is a network of 205 company owned and controlled leasehold stores operating under the OTR brand, comprising 174 integrated fuel and convenience stores and 31 stand-alone stores. It also includes 92 stores which incorporate quick service restaurants (QSRs) operated by OTR.
SMGB provides tobacco and cigarette wholesale arrangements to OTR and other retail third-party networks. Its retail network consists of 257 company owned and controlled leasehold stores across Australia, together with an online retail website.
Finally, the Mogas Regional and Reliable Petroleum wholesale fuel and lubricant businesses service customers in regional South Australia.
Acquisition rationale
Management highlights that this acquisition supports its "vision to be Australia's leading convenience retailer, with a pathway to establish more than 1,000 stores."
It also secures cutting edge convenience capabilities. It highlights that OTR generates over 70% of its earnings from non-fuel retail, which would otherwise have taken the company years to develop. This diversifies its earnings exposure, lifting the share of earnings from non-fuel sources from ~30% (post Coles Express) to an expected ~50%.
In addition, with electric vehicle usage growing, the company believes the deal leaves it well-placed to benefit from the change.
Viva Energy's CEO and Managing Director, Scott Wyatt, commented:
The introduction of OTR's superior convenience offering, including quick serve restaurants, will help revolutionise the diversity and attraction of our retail offering. As our stores increasingly become retail destinations, we expect convenience earnings will grow and reduce our dependency on traditional fuels.
OTR outlets offer an attractive and welcoming store environment, supporting increased dwell time, which is likely to be a key factor in successfully introducing electric vehicle recharging facilities over time.
The deal remains subject to customary regulatory approvals including FIRB and ACCC.
