Caltex Australia appears to have resigned itself to the inevitability of a takeover by one of its rival suitors after appointing recently recruited chief financial officer Matthew Halliday as interim chief executive and putting on ice a search for a permanent replacement for retiring Julian Segal.
The promotion of the former Rio Tinto Alcan CFO leaves the more experienced fuels industry executive, Louise Warner – considered the lead internal candidate to replace Mr Segal – in charge of operations amid volatile and difficult conditions in both refining and retailing that hit full-year profits.
“What is most important for us is to ensure we don’t lose our focus on running the business extremely well,” Mr Halliday said after Caltex posted a 38 per cent drop in benchmark profit for the full year.
“At the same time the change has set us up to be able to progress a transaction to ensure that ultimately the decisions to be made by the board are maximising value for shareholders.”
Chairman Steven Gregg said Caltex, which is fielding rival offers from Canada’s Alimentation Couche-Tard and Britain’s EG Group, wasn’t able to complete a search for a permanent replacement to Mr Segal with the takeover activity under way.
Analysts deemed the interim appointments sensible, noting Mr Halliday was well liked in the market and had performed well in his 10 months at Caltex after almost 20 years with Rio Tinto.
RBC Capital Markets analyst Ben Wilson described the appointment of interim executives to succeed Mr Segal as “a pragmatic response” to the situation, where Couche-Tard is carrying out due diligence for a $8.8 billion cash offer, and EG is waiting for a decision whether it can also examine the target’s books for a more complex cash and scrip proposal.
From my perspective it’s the ideal solution to deal with the situation we are in.
— Julian Segal
Mr Segal, who flagged his retirement more than six months ago, rejected suggestions the succession plan meant Caltex was raising a white flag on a takeover.
“From my perspective it’s the ideal solution to deal with the situation we are in,” he told The Australian Financial Review, adding that “sticking around too long” would only have created more volatility.
“We do have a very strong chief operating officer now in Louise Warner that will enable on the one hand Matt to dedicate more than the normal CEO’s time to this particular transaction, and at the same time ensure that the internal operations are being well taken care of.”
The board is still considering EG’s offer, which involves $3.9 billion in cash for the convenience retailing business and the rest in scrip, in what would be a separately listed fuels and infrastructure company under the Ampol banner.
JPMorgan calculates EG’s offer at $30.43 a share, less than Couche-Tard’s straight $35.25 cash offer, but the actual value depends on the trading value of Ampol. Shares in Caltex dipped 0.9 per cent to $34.15 on Tuesday.
But EG’s offer would involve a break-up of Caltex, losing the value that comes from managing an integrated fuels supply chain, starting with a trading and supply business in Singapore through to refining, imports, distribution and retail petrol stations.
Mr Halliday said integration had shown its worth in challenging wholesale market conditions in 2019, pointing to the capacity for “make versus buy” decisions on petrol and diesel, flexibility on sourcing crude oil and optimising supply to target premium fuels markets.
“I don’t accept you could do that as effectively if the business was dis-integrated,” he said.
The offer from EG – which bought Woolworths’ Australian petrol stations in 2018 – is also expected to hit competition hurdles, while funding remains uncertain.
Meanwhile, Caltex is still pursuing talks with other parties that have approached it since the Couche-Tard offer was disclosed, a line-up thought to include its former 50 per cent owner Chevron.
“We continue to engage with a range of other parties in relation to the situation, so it remains a very active space,” Mr Halliday said, declining to comment on how many parties were involved or the proposals under discussion.
Underlying replacement cost operating profit – the figure most closely watched by the market – dropped to $344 million, from $558 million in 2018, just above the mid-point of Caltex’s guidance in December.
The result was dragged down as expected by lower refinery earnings, tough competition and a soft broader market.
The bottom-line figure, which includes the value of stockpiles, fell 32 per cent to $383 million.
Caltex declared a final dividend of 51¢ a share, down from 61¢ for the second half of 2018.
Earnings from the fuels and infrastructure business fell 21 per cent to $450 million, while convenience retail earnings fell 34.5 per cent to $201 million, broadly in line with expectations.
Caltex is continuing to target an initial public offer of a property spin-off for mid-2020 that would release “significant capital”, but this will only proceed if the takeover offers fail.
Extracted from AFR