In a public announcement this morning, retail giant Woolworths Group Ltd (ASX: WOW) announced a new 15-year wholesale fuel arrangement with fuel business Caltex Australia Limited (ASX: CTX).

Up to 250 Caltex sites will be branded under the Metro convenience banner and another 125 Caltex sites will join the Woolworths petrol station network, receiving the popular 4 cents per litre discount offers. Woolies will continue to pursue its IPO of the Petrol business.

“While we were disappointed with the termination of the BP agreement, we believe the customer benefits of our alliance with Caltex, combined with a new fuel supply agreement will allow us to deliver a compelling outcome for both our customers and our shareholders,” Woolworths CEO Brad Banducci said.

Caltex CEO Julian Segal said, “The alliance with Woolworths will allow Caltex to provide a very competitive convenience retail offering to its customers, along with an expanded redemption and new loyalty offering.”

The deal will see Caltex make a one-off payment to Woolworths of about $50 million. In addition, the new long-term arrangement will reduce Caltex’s annualised operating profit (EBIT) by about $80 million relative to the existing contract. Therefore, the deal will save Woolworths’ Petrol business $80 million.

The revised deal certainly appears compelling for Woolworths. Especially as it plans to divest its Petrol business.

Caltex said the deal will provide certainty of supply for its fuel business and maintain its position as the leading provider of transport fuel in Australia. It will also tap into Woolworths’ extensive supply chain for convenience goods.

Caltex believes the benefits for its retail network will help it deliver on its target of an additional $120 million to $150 million in EBIT over the next 5 years. Caltex is due to report its first-half profit results in late August and said it will update the market at that time.

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