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Caltex shareholders put heat on suitor to extract higher offer

Sydney Morning Herald logo Sydney Morning Herald 3/12/2019 Elizabeth Knight
a sign on the side of the street: Caltex is trying to squeeze a higher bid out of its Canadian suitor. © Sasha Woolley Caltex is trying to squeeze a higher bid out of its Canadian suitor.

Caltex has made its fair share of mistakes over the past few years and its performance has lagged the market but the board’s response to the proposed $8.6 billion offer from Canada’s Alimentation Couche-Tard (ACT) deserves a tick. It employed textbook negotiating skills: say no but offer carrot.

Make no mistake, Caltex is in play. And its shareholders are set to benefit from the petrol retailer’s mighty value facelift. The only question is whether this will be executed by Caltex’s board and yet to be appointed new chief executive, its current suitor or another bidder.

This is a classic private equity play. Caltex has numerous high-quality assets that can be hived off, a strong cash flow and it has not earned to its potential.

It is considered likely that Canada's ACT, which is in the convenience store business, would have a plan to sell other parts of Caltex’s business such as refineries, in which it has no expertise.

On Tuesday the Caltex board rejected the offer price of $34.50 but offered its suitor the opportunity to take a limited peek at the books as a means to keep the auction alive.

Caltex’s share register is populated with a bunch of large active value managers that have been attracted to the company for a number of reasons.

Chief among them is the intrinsic value of its chain of petrol stations, it’s refinery assets, infrastructure assets and the potential for convenience stores to make good returns.

Plus it has a balance sheet stuffed with valuable franking credits.

These shareholders have been waiting a while for Caltex to shine.

But they don’t want the bidder to disappear, rather entice the Canadians by offering them a better taste of its assets.

The board understands these shareholders ultimately get to decide the price they find acceptable. And thanks to the board’s soundings, it has received a clear message that shareholders don’t believe the price offered is high enough.

As one major investor, who didn’t wish to be identified, said on Tuesday "why should Alimentation Couch-Tard get the upside that we have been waiting for".

For its part, ACT is playing the takeover playbook to a tee.

Back in October it sounded out the board at $32 a share, a price that was roundly rejected as cheap. This offer was made only a couple of months after Caltex announced its long-serving chief executive Julian Segal would be moving on.

Waiting much longer would allow Caltex to install a new chief executive with a new strategy and fresh potential to extract better returns from the company’s assets.

Armed with the knowledge that a predator was circling, Caltex announced the spin-off of its 250 freehold property sites that house its petrol stations. It also provided an update to the market on Caltex’s improved refiner margins.

It was a classic play designed to have the share price better reflect the value of the assets inside the business. It worked - the share price responded sufficiently that ACT offer's was pitched at a skinny 16 per cent premium.

It also played well into the narrative that ACT’s offer was opportunistic.

On Thursday the company will be holding an investor strategy day to convince shareholders there is even more upside under fresh management and a new focus on capital allocation.

The board understands it needed to keep its options open but its response to ACM is not exactly welcoming.

For example, the company is disputing the value of ACT’s offer of a special dividend which Caltex says is erroneously based on shareholders paying no tax. Caltex says the value of the special dividend should be assessed at a 15 per cent tax rate.

ACM’s appetite to improve the price of the offer will largely depend on whether it has plans already in place to carve up the company.

On most metrics, including enterprise value to earnings before interest tax depreciation and amortisation, the now-rejected offer was particularly generous.

Investors don’t like to signal the price at which they would accept an offer but $40 looks close enough to the pin for a deal to be done.

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