Viva Energy, the owner of the Shell brand in Australia, is making a big bet – with plans to spend a total of $1.4 billion on dramatically expanding itself into non-fuel retailing.
Viva bought control of Coles Express last September, paying $300 million for the half share it didn’t own and on Wednesday announced that it will spend $1.15 billion in going deeper into convenience retailing buying the Adelaide headquartered convenience chain OTR (On the Run).
Convenience retailing is a space where Shell, Ampol (nee Caltex) Coles, Woolworths 7-Eleven and several smaller wannabees have come and gone to varying degrees of success.
Woolworths and Shell have retreated, as has Coles. Caltex/Ampol have made a couple of attempts with Ampol’s latest version now seemingly fixed on a solid approach and 7-Eleven (and Mobil) still a major player.
Viva says it will pay $1 billion of the cost from its own reserves – effectively recycling the massive profits it has made from the surge in petrol and oil prices in the past year and bit. It will also issue $150 million of shares to the vendor, Peregrine Corporation to be held in escrow for up to 24 months “ensuring alignment”.
Viva said in Wednesday’s announcement that its purchase of the OTR business “further delivers on Viva Energy’s strategy to grow high-quality, non- fuel earnings streams, and provides a significant opportunity to unlock procurement and supply chain synergies.”
“The acquisition of Coles Express, announced in September last year, secures operational control of the convenience business across more than 700 stores, together with the organisational capability and wholesale supply arrangements to support and execute the existing Coles Express offer.
“The acquisition of the OTR Group secures leading convenience and quick service restaurant capability to rapidly deploy new formats across the network and further transform our convenience and mobility business.”
It will bring together the OTR, Coles Express and Viva Energy Retail businesses to establish a nationwide convenience network with more than 1,000 stores.
Viva claimed the purchase would:
“Immediately increase the earnings contribution from Convenience from ~30% to ~50% of the Convenience & Mobility business, reducing dependency on income from traditional fuels and increasing exposure to the fast-growing convenience sector.
“Extend the proven OTR convenience offer and technology platforms to Coles Express stores that can support the format, taking the OTR brand nationally and growing convenience sales. OTR’s convenience sales per store are, on average, more than double what is achieved through the Coles Express network presenting considerable growth upside.
“Achieve significant scale and synergies in procurement, marketing and functional support. OTR substantially reduces the time and cost of setting up infrastructure to replace the transitional services arrangements provided by Coles Group, by transitioning directly to proven and existing back-office infrastructure.”
In Wednesday’s statement, Viva provided this background on OTR which it said generates “more than $3 billion of revenue annually and employs around 6,500 people.”
The OTR Group comprises the OTR Convenience Retail network of 205 company-owned and -controlled leasehold stores operating under the OTR brand, comprising 174 integrated fuel and convenience stores and 31 stand-alone stores.
The network also includes 92 stores which incorporate quick service restaurants (QSRs) operated by OTR. The business has leasehold rights to a growth pipeline of 90 sites, largely outside of South Australia, which will be developed into new OTR stores over the next few years;
Smokemart and Giftbox (SMGB) provides tobacco and cigarette wholesale arrangements to OTR and other retail third-party networks. Its retail network consists of 257 company owned and controlled leasehold stores across Australia, together with an online retail website;
And the Mogas Regional and Reliable Petroleum wholesale fuel and lubricant businesses which service customers in regional South Australia.
Viva said that approximately 6,500 OTR team members and support centre staff will join the Viva Energy Group on their current terms and conditions. Viva Energy will retain the OTR head office in Adelaide which, along with the existing Melbourne-based team, will service the Group’s Convenience and Mobility business over time.
“OTR Founder, Mr Yasser Shahin, will be retained by Viva Energy to support the existing OTR Group and transition the business to Jevan Bouzo, Viva Energy’s CEO of Convenience & Mobility.
“Their combined priorities will be to integrate the businesses, build the operating structure, further develop the OTR network, test formats for deployment into the Coles Express network and realise synergies.”
The deal will need ACCC and FIRB approvals and if they are given, then the deal is due to settle towards the end of this year.
Investors liked the move and sent Viva shares more than 3% higher to $3.18, having touched a year high of $3.26 in trading.
