THE WALL STREET JOURNAL
NOVEMBER 30, 2009, 12:19 A.M. ET
SYDNEY (Dow Jones)–Shares in Caltex Australia Ltd. (CTX.AU) rallied Monday on renewed hopes its A$300 million proposal to buy ExxonMobil’s (XOM) Australian filling stations will get a conditional nod from the competition regulator despite earlier objections.
Shares in Australia’s only listed oil refiner ended the day’s trading up 6.1% at A$9.72. Macquarie Equities inspired some hope Monday by telling clients that it expects the deal to proceed. It also upgraded its recommendation on Caltex’s stock to Neutral from Underperform with a A$12.00 12-month price target.
Expanding its fuels marketing business would help diversify Caltex’s earnings base away from volatile refiner margins, which are being squeezed at the moment by a surge in regional refining capacity.
Caltex’s plans were dealt a blow in September when the Australian Competition and Consumer Commission raised serious concerns about the deal with ExxonMobil, which, if successful, would lift its share of the Australian retail gasoline market to 22% from 16%, putting it on a par with retailing giants Coles and Woolworths Ltd.
In its preliminary evaluation, the regulator said the proposed transaction would likely “substantially lessen competition” in wholesale fuel markets in New South Wales and Queensland states and may lessen wholesale competition in Victoria and South Australia states.
The ACCC also said that the proposed deal to acquire 302 filling stations is likely to substantially lessen competition at 22 stations and may lessen competition at another 45.
Since then, the ACCC has twice extended the deadline for its final decision, which is now expected to be handed down Wednesday.
“After much deliberation, we expect the ACCC to approve the ExxonMobil acquisition, albeit with several caveats,” Macquarie analyst Adrian Wood said in a client note.
“This optimism is based on the fact that the ACCC has had two previous opportunities to block the deal but instead has chosen to investigate further.”
Caltex Chief Executive Julian Segal said on Nov. 12 that the delays are a signal of the complexity of the issues rather than an omen on which way the regulator is leaning.
“I am absolutely convinced that there are no competition issues,” Segal said.
Not all analysts, however, agree that the deal is likely to proceed, with UBS saying on Nov. 12 that it continues to see a low chance of success.
Since then, the ACCC has requested an extension on the timing of its decision. UBS analyst Gordon Ramsay said Monday it will still be tough for Caltex to get the deal done.
“It could go through, it’s not impossible,” Ramsay said.
“But if you look at the statement provided by the ACCC in September, it implies that there are some significant competition issues at the wholesale level that could flow through to the petrol retailers and also pricing.”
In an interesting observation, Macquarie’s Wood said that blocking the deal would make it hard for Australia’s federal government to push Caltex to buy ExxonMobil and Royal Dutch Shell Plc’s Australian refining assets on energy security grounds, if they should decide to sell them.
Neither ExxonMobil or Shell have announced any such plans, but Wood said it’s appearing increasingly likely that they will.
In its September statement, the ACCC calculated that, should the ExxonMobil deal go through, the wholesale supply of unleaded fuel volumes into the Australian market would be 55%-controlled by Caltex in New South Wales, an increase from 46%. In Queensland, it would rise to 46% from 41%.
-By Ross Kelly, Dow Jones Newswires; 61-2-8272-4692; firstname.lastname@example.org