Caltex Struggles With ACCC Knock-Back

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By Andrew Nelson

Australia’s consumer watchdog, the Australian Competition and Consumer Commission (ACCC), has blocked an attempt by Caltex ((CTX)) to buy 302 petrol stations from its rival Mobil. After a six-month investigation, the ACCC said the deal would hurt competition and eventually lead to higher prices at the pump.

The big problem for Caltex is that more than 90% of the nation’s petrol stations are already controlled by the big “oil” companies, Coles ((WES)) and Woolworths ((WOW)). All up, the ACCC found that a total of 53 Mobil stations, if acquired by Caltex, would “lead to reduced retail competition resulting in higher fuel prices for consumers”.

The $300m deal would have also given Caltex Mobil’s refineries in Australia, seeing it gain control of 44% of Australia’s wholesale fuel market, allowing the company to sell an additional 1.8bn litres of fuel a year. This would have reduced the number of refining players from four to three and while this was not an issue that was directly noted by the ACCC, it did make some pointed comments about possible co-operation in setting fuel prices between Caltex and other oil refiners who also own petrol stations like Shell, Mobil and BP.

Such co-operation, notes the ACCC, would likely also lessen competition in contravention of section 50 of the Trades Practices Act. In fact, the ACCC went so far as to say that it thinks the Trade Practices Act doesn’t adequately cover practices that enable “such coordinated conduct”. This raises some questions about the future of the Trade Practices Act in its current form and could imply that changes may be in the works. That could be bad news for the fuel marketing margins that Caltex manages to generate.

Post the news and the initial wave of broker reaction, the FNArena Sentiment Indicator is sitting at minus 0.2 on one Buy, three Holds and two Sells. It was just one Sell yesterday, but Deutsche Bank downgraded its recommendation this morning.

The broker says the blocking of the proposed transaction will make inorganic growth a tough thing to accomplish for Caltex. One thing the above commentary shows is that petrol prices are becoming a very big issue for the ACCC, and given Caltex’s substantial wholesale and retail market share, Deutsche believes the company will struggle to grow this side of its business.

Add the poor growth outlook to an already weak macro refining environment, the strong AUD and weakening freight differentials, and the broker thinks that 2010 will be a bad year for Caltex. This less than rosy outlook also has the broker rethinking its dividend forecasts.

The ACCC-Mobil news and a mark to market exercise factoring in lower margins and weakening demand sees the broker cut its 2H09 earnings forecasts. Given Deutsche sees no sign of a near-term fundamental turnaround, it has also cut its dividend forecast for 2H09 to zero.

Credit Suisse maintained its Neutral call, but it did cut its target price to $10.60 (from $12.70) and downgraded its earnings forecast in 2009 by 3%, 2010 by 16% and 2011 by 4%. The broker cites the same reasons as Deutsche: the removal of the Mobil acquisition from forecasts, declining refiner margins and an increase to its AUD/USD forecast.

The broker fails to see any sort of positive re-rating catalysts for the company through the remainder of 2009 and going well into 2010. In fact, Credit Suisse sees little upside anywhere in the refining sector for the next 12-24 months and notes that Caltex still needs to deliver growth in production capacity. The broker thinks a more aggressive growth strategy driven by acquisitions could help, but it sees this as unlikely given the company doesn’t have much to spend.

Macquarie is a little more optimistic than the rest of the pack, believing this story isn’t over yet. While the broker admits that losing on this deal will be a big blow to Caltex for many of the same reasons mentioned above, it thinks 53 petrol stations are far from a deal stopper.

Given the obvious benefits of this deal to both Caltex and Mobil, Macquarie believes neither have given up on this acquisition. Citing “some ambiguous language” in the ACCC’s statement, the broker thinks the door may have been left ajar for further negotiation. Macquarie’s forecasts, price target and recommendation were left unchanged on the news.

As at 11.35am today, shares in Caltex were down 16c at $9.31 versus a 12-month trading range of $6.18-$14.00.

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