Leading Australian retailer, Coles Group Limited (ASX: COL) made an announcement on 6 February 2019 stating that it has entered into an agreement with Viva Energy Limited to restructure the terms of the Fuel and Convenience Alliance. Both the companies have also agreed for the extension of Alliance until 2029. Despite this news, the share price of the company tumbles by 2.2% on ASX in the intraday trade.
As per the company’s announcement, this New Alliance will deliver a more competitive customer offer, and it will allow both the companies to leverage their core competencies. The New Alliance will give an opportunity to both parties to expand their network.
As per the New Alliance Agreement, Coles Group is going to receive a commission per litre from Viva Energy based on fuel volumes achieved. Further, Viva Energy will set the retail price of fuel, and it will get the retail fuel margin. As per the terms of New Alliance Agreement, Viva Energy will pay $137 Mn to Coles group at transaction close, and Coles will also receive a further payment for the Convenience business at the expiry of the Alliance.
The New Alliance Agreement contains a certain additional term which ensures the protection of Coles’ Convenience business so that it could achieve a satisfactory return on capital over the medium term.
The Existing loyalty benefits which include Coles’ four cents per litre fuel docket discount across all Alliance sites and ability to earn flybuys points on fuel and merchandise across all Alliance sites and the existing loyalty benefits will continue to be available to Coles’ Convenience customers.
As per Coles’ CEO Mr. Steven Cain, the management of the company believe that the advantages of the New Alliance are compelling for all customers and shareholders. Further, the company is looking forward to work in collaboration with Viva Energy to establish the Alliance as a leading petrol and convenience retailer in Australia.
As per company’s announcement, the trading conditions in the Cole’s Convenience division in the first half had been challenging driven by the ongoing impact of previous changes of commercial terms in the Alliance, increased global oil prices and weaker Australian dollar. The trading conditions in the Second quarter remained challenging resulting in further volume declines.
Under the New Alliance Agreement, both parties (Coles and Viva) are expecting their volumes to grow over the medium to long term and it is expected that the Future Coles Convenience earnings will be lower than the segment has reported in the past after moving to a commission model that reduces volatility in earnings.
As per the terms of the New Alliance Agreement, based on volumes increasing to an average of 75 million litres weekly as indicated by Viva Energy, the Convenience business is expected to generate yearly pro-forma EBIT in the order of that expected to be achieved in FY 2019, assuming increased Convenience shop sales in-line with the expected fuel volume growth.
In the last one month, the share price of the company increased by 8.71 percent as on 5 February 2019. COL’s shares traded at $12.450 with a market capitalization of circa $16.98 billion as on 6 February 2019 (AEST 2:53 PM).
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