The Ampol Ltd (ASX: ALD) share price is up by more than 7% after revealing it plans to buy EG Group Australia.
Ampol is a leading transport energy provider in Australia. It supplies branded petrol and service stations, as well as refining, importing and marketing fuels and lubricants. It also offers electric vehicle charging too. The business also has 16 terminals, six major pipelines, 55 wet depots and one refinery located in Lytton, Queensland.
Ampol to buy EG Group Australia
The fuel business said it has entered into a deal to buy the entire EG Group Australia business for $1.1 billion.
Ampol said it’s a significant opportunity to acquire approximately 500 Ampol-branded company-owned and operated sites.
The company said the deal offers compelling financial metrics, with targeted synergies of between $65 million to $80 million. It also said this would accelerate its retail growth strategy through a scaled-up Ampol Foodary brand and a value-oriented U-GO branded offer.
Amp said it expects this deal to boost its underlying earnings per share (EPS) in the high-single digits and grow free cashflow per share, after synergies.
It will fund the deal with $800 million cash from existing debt facilities and $250 million of Ampol shares issued to the seller, subject to escrow arrangements (no share sales allowed for a certain period of time) to “ensure alignment”.
This deal is not guaranteed to happen because it’s subject to approval by the Australian Competition and Consumer Commission (ACCC). Ampol plans to divest approximately 20 sites to hopefully satisfy competition concerns.
Leadership commentary
Ampol CEO and Managing Director Matt Halliday said:
The proposed EG Australia acquisition makes sense for Ampol. It is a business and market we understand well, given our multi-year relationship with them including fuel supply (~2.3BL per annum) and brand licence agreements. We are uniquely placed to leverage our demonstrated capability as a known and trusted brand in fuel and convenience retailing.
A larger, combined network will allow us to better serve a broader customer base – through the expansion of our Ampol Foodary convenience retailing network, the accelerated rollout of our value-oriented U-GO offering, and expansion of the Woolworths Everyday Rewards program.
Our successful transition from a largely franchise model, the national rebrand to Ampol, and the ongoing U-GO site conversions demonstrate our ability to manage organisational and operational change effectively and support strong returns.
This is the next major step in our strategy to improve the quality of the Ampol Group’s earnings. The benefits of this transaction, will underpin the continued growth of our Convenience Retail business which has delivered more than 5% compound annual growth rate in EBIT over the past five years.
Final thoughts on the Ampol share price
The market clearly likes this deal, as it would give the business a significant boost to its scale advantages. Hopefully it doesn’t lead to higher petrol prices.
Ampol isn’t on my watchlist, but I can see why investors have pushed the valuation higher.
Even so, there are other ASX dividend shares I’d rather buy for my portfolio.
