Viva Energy Group (ASX: VEA) to acquire OTR Group for AU$1.15bn; stock hits 52-week high

Highlights:

• On Wednesday, Viva Energy Group Limited (ASX: VEA) informed about inking a binding deal for the acquisition of the OTR Group for AU$1.5 billion.
• The transaction is anticipated to conclude by the end of 2HFY23, conditional on customary FIRB and ACCC consent.
• VEA anticipates the acquisition to generate AU$4.2 billion of sales revenue in FY2023.

Viva Energy Group Limited (ASX: VEA) announced on Wednesday, 5 April 2023, that it has inked a binding deal to acquire the leading independent convenience retailer OTR Group valued at AU$1.5 billion from Peregrine Corporation.

VEA stock reacted positively to the update and jumped as much as 5.84% to a fresh 52-week high of AU$3.260 in morning trade.

Strategic rationale behind OTR group’s acquisition by Viva Energy

The acquisition of OTR Group backs VEA’s aim to become Australia’s leader in convenience retailing space, with an aim to open more than 1K stores. The company gains advantages in convenience capabilities as the OTR Group delivers above 70% of earnings from non-fuel retail. To achieve this, VEA would have otherwise taken years to reach this stage.

The transaction diversifies earnings exposure, raising the share of income from non-fuel sources from nearly 30% (after Coles Express acquisition in September last year) to an anticipated around 50% of the Convenience & Mobility business.

Financial effect on Viva Energy from the OTR Group’s acquisition

VEA anticipates the acquisition to generate AU$4.2 billion of sales revenue on a pro forma forecast FY2023 (ended June) basis, including AU$2.4 billion of non-fuel sales. The deal is expected to add AU$165 million EBITDA (RC) after integration and synergies, of which AU$15 million -AU$20 million will be allocated to Commercial & Industrial.

Subsequent Earnings per share addition of 6% to 26% (6% on pro forma FY2022 basis, 11% on normalised FY2022 based on past average refining earnings and 26% comparative to pro-forma FY2021).

The incorporation of OTR into Viva Energy Retail and Coles Express networks is anticipated to propel synergies of around AU$60 million a year (to be achieved in three years’ time).

The acquisition of the OTR network and wholesale fuel businesses by VEA will be executed through a stock sale, whereas the SMGB business will be acquired through an asset sale.  

The acquisition will be financed via AU$1 billion of debt and working capital. The equity part of AU$150 million will be issued to the sellers. The debt part is to be financed via present debt facilities together with connecting finance, with long-term debt facilities set up across time.

On the equity part, 50% will be escrowed for a 12-month duration after the conclusion of the transaction. The rest will be escrowed for a 24-month duration. The number of securities issued to the sellers would be based around the 20-day VWAP before inking the deal contingent on adjustments if VEA issued securities at a price lesser than the VWAP in the duration before conclusion).     

The conclusion of the transaction is anticipated by the 2HFY23, conditional on customary FIRB and ACCC consent. In case this conclusion would not be moving ahead, the parties involved have consented to specific fall-back provisions for continuous supply and also the transfer of the commercial bulk fuels business (conditional on regulatory terms) on commercial arms’ length conditions.