Ampol Fuels Up On Z Energy

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Ampol has cemented plans to acquire New Zealand's Z Energy, which would deliver a significant market share of fuel refining and retail across the Tasman

-Post Z Energy acquisition, Ampol expects NZ$60-80m in synergies from supply chain optimisation
-Transaction to be funded largely from debt and hybrid issue
-Sale of Gull NZ a key commitment to completing the deal

By Eva Brocklehurst

Ampol ((ALD)) has provided further detail in its plan to acquire New Zealand's Z Energy ((ZEL)), making the business a major trans-Tasman refiner and fuel retailer. The company has indicated it would apply for a secondary listing on the NZX once the merger is completed.

Ampol's short fuel position, which involves selling more fuel than it produces, will be increased, allowing better usage of infrastructure in Australia while improving earnings from trading operations in Singapore and the US.

The scheme of arrangement has been set at NZ$3.78 a share, allowing Z Energy to pay a first half interim dividend up to NZ$0.05, representing a premium to the closing price of Z Energy on July 26, which UBS points out is the day prior to first speculation about the transaction.

Ampol expects NZ$60-80m in synergies, which UBS expects can come from supply chain optimisation, as Z Energy will operate independently as a subsidiary. Optimisation of the fuel supply chain and the retail and wholesale network is considered a key support for the deal.

The transaction will be funded largely from debt and include a new $600m hybrid issue. UBS believes the hybrid should reduce the risk the company needs to raise equity, while Credit Suisse suspects the extra debt is not really necessary to achieve leverage and the decision comes down to cost and funding flexibility.

Assuming a $600m issuance, the broker estimates leverage at around 2.0x FY23 operating earnings (EBITDA) on completion and assesses the transaction is 10-14% accretive in the first full year with free cash improving 20-30%.

UBS expects the transaction should be 4-20% accretive to earnings per share and 6-26% accretive to free cash flow through FY22-24 even after assuming $70m in interest costs from the additional debt while Morgan Stanley calculates, assuming no equity is raised, that synergies will be in the mid-point of guidance.

The broker suspects sentiment is improving as investors were fearful of an equity raising and hope for more off-market share buybacks. Now, more clarity has been provided on the potential synergies and accretion with the takeover offer. Morgan Stanley also suggests Ampol is highly leveraged to the re-opening after lockdowns as global mobility increases.

There is a risk to retail margins, given rising oil prices, but a recovery in refining should counter this and provide the main catalyst in the next update, the broker adds, along with further data on mobility and aviation trends.

Credit Suisse asserts critics of the transaction will point to the fact capital is being allocated to a mature fuel market, given the Z Energy house view is for petrol consumption to decline -40% by 2035 from an FY18 basis. The company's forecast is for diesel consumption to increase to the end of the decade and be in line with the 2018 level in 2035.

Regulatory Risks

Ampol has committed to divest Gull NZ to accommodate potential objections from the competition regulator. Gull NZ contributes around $70m to EBITDA and Credit Suisse notes Z Energy has 40% of the NZ retail market share while Gull has 7%.

While the transaction is expected to be completed in the first half, UBS suspects there is a risk regulatory approvals could take longer because of the commitment to divest Gull NZ, which will be done either through a trade sale or IPO, and calculates Ampol could realise $400-600m from the sale.

The broker also anticipates the process could take longer than nine months in order to manage the expected competition concerns of the NZ Commerce Commission. UBS supports the transaction because it will consolidate the retail fuel position in the trans-Tasman region, with the combined group selling 23.5bn litres of fuel and operating 2400 retail sites.

Jarden agrees a deal like this usually takes 6-9 months and there are several potential risks, including no material adverse changes, in that the net assets of Z Energy must not decline by -NZ$100m or more against the average of net assets. There is the "long stop" of October 11, 2022, whereby Z Energy can exit the process if it is still incomplete.

The deal also requires approvals from the NZ Overseas Investment Office as well as the NZ High Court on top of a shareholder vote. An independent advisers report is expected ahead of the shareholder vote.

From the Z Energy perspective, Jarden believes the total consideration suggests an NZ$3.56-3.64 spot valuation per share which is in line with its own valuation. The broker does not expect a competing offer at this late stage. As a result, Jarden has reduced its rating of Z Energy to Neutral from Overweight.

FNArena's database has two Buy ratings and two Holds for Ampol. The consensus target is $32.16, suggesting 7.2% upside to the last share price.

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