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ACQUISITION OF OTR GROUP

Need To Know

• Pathway to 1,000 stores and ~50% of group earnings will be non-fuel
• Funded by $1bn debt and $150m equity issuance to vendors (escrowed 12-24 months)
• OTR generates >70% of earnings from non-fuel retail (VEA ~30%). Potential VEA valuation multiple re-rate

Viva Energy will pay $1.15bn to acquire OTR Group to fast-track its convenience retail business across Australia.

OTR Group. OTR has a convenience retail network of 205 stores comprising 174 integrated fuel and convenience stores and 31 standalone stores. The network includes 92 stores which incorporate well-known fast-food outlets (under licence) such as Guzman Y Gomez, Subway, Hungry Jacks and others. The South Australian based OTR Group employs about 6,500 people. The business is headed by founder Yasser Shahin who remain with the business to help integrate it into VEA’s Convenience and Mobility business. $150m of the acquisition price is an equity issuance to the sellers, escrowed for 12-124 months on completion of the deal in 2H23.

Strategic rationale. In simple terms, this acquisition will rapidly transform VEA’s business towards convenience retail (non-fuel) while being earnings accretive with significant synergies in marketing and fuel wholesaling. It also provides a substantial growth pathway to extend the network towards 1,000 stores making it comfortably the largest such network in Australia. OTR has a clearly superior retail convenience offer compared to VEA (OTR revenue per site ~2.5x higher vs Coles Express sites) a and this will help to not only increase earnings but lift the offer across the whole group.

Financials. Pro forma basis for FY23f, VEA is expected to report group revenue of $4.2bn including $2.4bn of non-fuel sales. Group EBITDA will increase by about $165m post integration and synergies (c$60m pa for 3 years). Net debt to EBITDA will be 0.6-0.8x with the acquisition funded by debt ($1bn) and equity ($150m issued to vendors). EPS accretion of 6% on pro forma FY22, 26% relative to FY21.  VEA is paying 11x EV/EBITDA, falling to 7x post synergies. 

Investment View

This deal will substantially change the risk profile of VEA and the valuation multiple it should trade on. With more than half of group earnings now non-fuel, and with growth options in convenience retailing galore, VEA should be valued more like that of Canadian peer Alimentation Couche-Tard (ATD) which recently paid 8x EV/EBITDA for a similar business in Germany. If VEA can transform its convenience retail to a similar European standard, it would suggest VEA will deserve the same or higher multiple as the Australian market is far less competitive. We expect meaningful EPS upgrades to market estimates across FY24-FY26.