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Woolworths and Caltex have decided to work together after all

Business Insider Australia logo Business Insider Australia 5/07/2018 Chris Pash


© Provided by Business Insider Inc Woolworths has shrugged off a failed deal with BP to ink a new long term alliance with Caltex as the supermarket chain continues to look at either floating its petrol business or selling it off.

The four cents a litre discount deal for Woolworths shoppers will be expanded to 125 Caltex sites, adding to the 638 Woolworths rewards redemption sites.

Under the 15-year supply deal, Caltex will make a one-off payment to Wooolworths of $50 million. The new fuel supply agreement is on terms that represent a $80 million reduction in annual earnings to Caltex compared to the old contract.

Last month BP Australia dropped plans to buy petrol stations from Woolworths for $1.8 billion after the competition watchdog, the ACCC, decided to oppose the proposed sale on the grounds that it could lift prices at the bowser.

Today Woolworths announced a new strategic alliance and 15-year wholesale fuel supply agreement with Caltex but says it will continue to pursue an initial public offering or sale of the petrol station business.

The deal includes an agreement by Caltex and Woolworths to co-create a convenience retail offering, across 250 Caltex retail sites. The sites will be co-branded.

“While we were disappointed with the termination of the BP agreement, we believe the customer benefits of our alliance with Caltex, combined with a new fuel supply agreement will allow us to deliver a compelling outcome for both our customers and our shareholders," says Brad Banducci, the CEO of Woolworths.

"Customers will have access to an extended redemption and loyalty network and an exciting new convenience food format.

“The Woolworths Petrol business is in a good position to pursue its own growth agenda supported by a highly competitive fuel supply agreement and a strengthened management team, all underpinned by solid links to the Woolworths food business.”

Woolworths expects the pre-tax benefit from the deal to exceed $80 million a year.

Caltex CEO Julian Segal says the alliance with Woolworths will allow Caltex to provide a very competitive convenience retail offering.

"It represents a significant milestone in the transformation of Caltex," he says.

"Not only do these agreements secure the long-term supply of quality fuel to the Woolworths sites, but they accelerate our Freedom of Convenience Strategy and confirm Convenience Retail as a core business alongside Fuels & Infrastructure.”

Caltex forecasts its retail commercial arrangements with Woolworths should deliver results towards the top end of the range of the previously announced $120 million to $150 million earnings uplift in five years.

Woolworths, which has been under increasing price competition from discount players, posted a 4.7% increase to $9.6 billion in sales for the third quarter, keeping the supermarket group well ahead of rival Coles in terms of growth.

For the latest half year, Woolworths posted a 37.6% rise in net profit after tax to $969 million.

Adjusted for earnings from fuel operation rose by 14.7% to $902 million.

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