EUR 850.00 For Business Accounts Only

Morningstar | Woolworths Sells Its Petrol Business, For Real This Time. FVE Unchanged at AUD 24.50

After a false start in late 2016, narrow-moat rated Woolworths delivers on its promise to settle the fate of its petrol business before Christmas 2018. British EG Group has entered into a binding agreement to purchase Woolworths’ network of 540 petrol stations. The sale price of AUD 1,725 million is a touch lighter than our AUD 1.8 billion estimate of the segment’s value and the AUD 1,785 million BP was willing to pay a couple of years ago. Nonetheless, the proceeds of the sale strengthen the group’s balance sheet and open the door to capital management, potentially in the form of a special dividend to shareholders.

We don’t expect Woolworths’s other businesses to be negatively impacted by the sale of its petrol stations. The parties agreed to a 15-year commercial alliance which will see the continuation of Woolworths’ AUD 4 cent-per-litre fuel discount and customers earning Woolworths Rewards points on both fuel and merchandise.

Following the transaction, the costs associated with funding its half of the discount offer, some AUD 30 million per year, are allocated to Woolworths’ Australian Food segment. Despite the marginally lower than expected price tag and some costs remaining with Woolworths, the impact on our intrinsic assessment is immaterial and we maintain our AUD 24.50 fair value estimate. Yet shares continue to screen as overvalued, trading on a fiscal 2019 price/earnings ratio of 23, and a 20% premium to our fair value estimate.

The deal is likely to close in early 2019, subject to Foreign Investment Review Board approval. EG Group doesn’t have a presence in Australia, and we understand approval from the Australian Competition and Consumer Commission isn’t required. The competition watch-dog had knocked back BP’s takeover attempt as it ruled the ensuing market concentration was likely to translate into less competitive pricing at the pump.