Viva Energy acquires Coles Express for $300m

Four weeks after posting record half-year earnings, with an eightfold boost in revenue from refining, capping off a remarkable turnaround for the business, Viva Energy (ASX: VEA) has announced the $300m buyout of Coles Express.

The stock was up 3.80% at the open on revelations that the deal will see the petrol and diesel supplier become Australia's largest fuel and convenience operator with 710 sites across Australia.

Viva's network currently comprises Shell Coles Express, independently operated Shell and Liberty service stations, and sites the company owns and operates through its partnership with Westside.

Over time the Coles Express brand will transition to the new store brand to reflect Viva’s "long-term positioning of the convenience offer."

Former alliance ends

Today’s announcement effectively ends the previous alliance between the two fuel retailers which was otherwise due to run until 2029.

Management notes by bringing together the two businesses now, rather than at the natural end of the Alliance in 2029, Viva can more efficiently optimise the network.

After taking into account working capital and existing fuel stock, the buyout reduces to $143m, which will be funded from existing cash reserves and debt.

Subject to Foreign Investment Review Board (FIRB) approval, the deal completion is expected during the second half of FY23.

Growing market

Viva management advised investors that the convenience market in Australia has achieved average annual growth of 3.1% in the last seven calendar years, while Coles Express convenience sales have risen 3.7% on average in the seven years to 30 June 20224.

Driven by population growth, changes in mobility, and increased consumer demand for convenience led offers, Viva expects the convenience segment to continue to deliver strong growth potential over the long term.

In FY22 Coles Express posted sales of $1.13bn, earnings (EBIT) of $42m and imputed lease interest of $38m.

Coles Express also accounted for $816m of the lease liabilities.

Financial impact

Synergies aside, Viva’s management notes the deal effectively amounts to:

• $1.14bn of convenience store sales revenue on a FY2021 pro-forma basis

• $45m-$70m to FY2021 retail earnings on a replacement cost basis

• Earnings per share accretion of 11-18% relative to FY2021 based on a pro-forma, post integration basis

• One-off integration costs are expected to be approximately $120m-$140m over the next three years.

Transaction overview

Around 6,000 Coles Express team members and support centre staff are expected to be offered roles with the Viva's retail business on at least the same terms and conditions.

Land occupied by Coles Express at the sites where the supermarket retailer is the sub-tenant of Viva, reflecting 664 sites, will return to Viva.

Existing loyalty programs, including participation in FlyBuys and the 4c per litre fuel discount dockets with Coles supermarkets (ASX: COL), will continue.

What brokers think

Viva’s share price is up around 15% over 12 months but has been bouncing lower since early September.

Consensus on Viva is Moderate Buy.

Based on Morningstar’s fair value of $3.06 the stock appears to be undervalued.

Based on the six brokers that cover Viva (as reported on by FN Arena) the stock is currently trading with 23.2% upside to the target price of $3.24.

Due to higher refining margins and a weaker A$, Macquarie raised its 2022 and 2023 EPS forecasts for Viva 9%, and maintains an Outperform rating and $3.50 target.

Despite being impressed by Viva’s first half earnings, Morgans suspects this year will likely be peak earnings for this cycle and maintains its Hold rating. Target price $3.

Look out for broker updates later this week.

Viva Energy share price over three months.