Overview: The exit of Chevron from the NZ fuel market was flagged last week when the company sold their holding in the New Zealand Refining in a block sale to institutions and broking firms. This complete exit was confirmed when Z Energy announced an agreement to purchase Chevron’s downstream fuel business, principally the Caltex brand and the associated assets.
Pros: The $785 million acquisition will be earning accretive from the get go, with earnings per share expected to rise by 34 percent (before the impact of any synergies that may be achieved). The two companies obviously have many complimentary assets, and together will boast 49 percent of the New Zealand retail fuel market.
The purchase price is at attractive multiples and investors will be pleased to see that less than a quarter of the transaction will be funded through new capital from Z Energy shareholders, with the bulk being funded through debt. Debt levels will remain within reasonable bounds.
Cons: Is a 49 percent market share too much? That is the question that the Commerce Commission will now have to answer. The key principle that the Commission will look at is whether this deal will “substantially reduce competition in the market.”
The Commission will look at whether the merged entity has a high market share, whether there are substantial barriers to new competition, whether the merged entity has price dictating power and whether the merged entity makes the industry more susceptible to coordination on prices.
These issues will be hotly debated over the next few months, with Z Energy confident of Commerce Commission approval by the end of 2015
Price performance: The share price jumped over 20 percent after the announcement, and is up over 70 percent since the company was listed in 2013
Investment outlook: The market, as evidenced by the 20 percent jump on Tuesday, clearly expects the Commerce Commission to play ball. Z Energy’s performance in the short term will depend heavily upon that.
*A Broker's View is written by Grant Davies, Investment Advisor at Hamilton Hindin Greene Limited. This article represents general information provided by Hamilton Hindin Greene, who may hold an interest in the security. It does not constitute investment advice. Disclosure documents are available by request and free of charge through www.hhg.co.nz.