This week, Viva Energy surprised the Australian fuel industry by announcing that it had reached an agreement with the Peregrine Corporation for the acquisition of the OTR Group. Analysis of the $A1.15B deal reveals that the primary motivation for the transaction was to accelerate Viva Energy’s aspiration to become the leading Mobility & Convenience business in Australia, as it positions for the future.
In a surprise move on 5 April 2023, Viva Energy announced that it had reached an agreement with Peregrine Corporation to acquire the OTR Group for total consideration of A$1.15BN. The deal, which will be subject to Federal Investment Review Board (FIRB) and Australian Competition and Consumer Commission (ACCC) approval, is expected to be completed by the end of 2023.
The deal will see ownership of OTR’s 205 P&C outlets (174 service stations and 31 non-fuel outlets), the 257 store SmokeMart/Gift Box retail network, and Mogas’ wholesale fuel business transfer from the Peregrine Group to Viva Energy. The arrangement will see the OTR commercial convenience offering progressively rolled out across VIVA’s existing Coles Express network of more than 706 company-controlled stores over the next few years, giving the company a national network of 911 company operated stores (with a further 90 stores in the pipeline) – the largest company operated network in Australia.
While the acquisition of the OTR P&C outlets will increase Viva Energy’s fuel retail volumes by just over 660M litres per annum, analysis of the deal indicates that this was not the primary motivation for the acquisition.
Viva Energy have indicated that the acquisition of OTR – largely recognised in the industry as one of the leading Australian convenience retailers – was primarily motivated by a desire to accelerate progress towards Viva’s aspiration to become the leading Mobility & Convenience business in the country.
In a briefing to the investment community this week, Viva Energy CEO Mr Scott Wyatt explained that the deal was motivated by five strategic considerations as the company positioned itself for the future, namely:
- To establish a pathway to build a nationwide convenience network of more than 1,000 stores with a market leading convenience and mobility offering.
- Greater earnings diversification to convenience and the broader retail sector, to deliver solid, defensive growth over the long term in the face of an evolving P&C market
- Extension of the OTR offer and technology platforms to the national Coles Express stores that support the format, taking the OTR brand to the national market and growing convenience store sales on a per store basis.
- Realising synergies in procurement, marketing and functional support by bringing the three businesses (Viva Energy, Coles and OTR) together under a single operation
- Consolidating digital and loyalty offers across the network.
Non-fuel revenue currently accounts for around 30% of the gross profit earned from Viva Energy’s existing national P&C network (including Coles Express). By leveraging the OTR convenience offer nationally, and embedding the OTR’s existing organisational capabilities, Viva Energy expects to grow non-fuel revenue to around 50% of gross profit from its network.
As with all acquisitions of this magnitude, real-world realisation of the potential benefits of the transaction will require careful translation of the OTR value proposition to Viva’s existing national network. In recognition of this requirement, the deal will see Mr Yasser Shahin (the current owner of the OTR Group) maintain a leadership position with the transition team in the two-year period following completion of the transaction.
The deal also has to secure approval from the ACCC who will be interested in the degree to which the transaction may or may not alter the nature of the industry competition dynamic. This consideration will be particularly relevant in South Australia, where OTR (under the BP Brand) has traditionally competed against 43 company operated Viva sites and a host of Viva branded dealer sites.
While there will likely be much talk about the impact of this deal on the traditional fuel and convenience market in Australia, this transaction is a watershed for the Australian Petroleum and Convenience industry. It provides evidence of a tangible shift of the Australian P&C industry, from a predominant focus on fuel retail to one incorporating new mobility, convenience and hospitality offerings delivered at a local community level.
“The Viva Energy/OTR deal is nationally significant and one that sends a clear message to those working within the industry – and those watching from the outside”, says ACAPMA CEO Mark McKenzie.
“For those within the industry, the clear message from this deal (and the recent strategic actions of other national P&C businesses) is that there is a significant opportunity to future-proof our industry by fully committing to the expansion of local convenience and hospitality offerings, in the face of a projected decline in the demand for conventional fuels over the next two decades,” he said.
“For those watching from the outside – including the investment community and politicians and the broader the community – the unmistakable message is that our industry is not going to skulk off into the distance as battery electric vehicles and hydrogen vehicles take hold in the national vehicle fleet.
“Rather, our industry will continue to utilise our extensive national asset base and growing retail capability to create a dynamic Mobility & Convenience offering that will deliver positive business returns for many years to come”, Mr McKenzie said.
