Ampol Ltd [ASX:ALD] entered a binding scheme implementation agreement to acquire 100% of Z Energy.
After months of talks and deliberations, Ampol and Z Energy finally came to an agreement that will see Ampol acquire Z Energy for a cash price of NZ$3.78 per share.
Additionally, Ampol’s offer includes an adjustment mechanism where Ampol will pay a further cash amount of NZ 5.5 cents per share per day for each calendar day that completion of the transaction extends beyond 31 March 2022, with a limit of NZ 10 cents per share.
The deal sparked buying activity in both stocks, with Ampol Ltd [ASX:ALD] share price currently trading at $30.22 per share, up 3.60%. ZEL shares, in turn, are currently up 6%, exchanging hands for $3.42 a share.
ALD acquires Z Energy
Under the terms of the scheme, Ampol will acquire 100% of Z Energy’s shares for a cash offer price of NZ$3.78 per share.
Ampol says the offer price is a ‘compelling value proposition for Z Energy shareholders’ and represents a 35% premium to the last close on 26 July — the day prior to the first press speculation regarding a potential takeover.
The proposal from Ampol followed earlier unsolicited, confidential, and non-binding indicative proposals to ZEL for NZ$3.35, NZ$3.50, and NZ$3.60 per share.
Per the deal, Ampol also agreed to Z Energy paying a dividend of NZ 5 cents per share with respect to the half-year ending 30 September 2021, all the while holding the offer price constant.
Z Energy said Ampol agreeing to the dividend payout means the overall value of the acquisition to ZEL shareholders comes to NZ$3.83 per share.
Z Energy’s board unanimously approved the scheme and recommended shareholders vote in favor.
The proposed acquisition is subject to a Z Energy shareholder vote, a New Zealand High Court approval, and regulatory approvals including New Zealand Commerce Commission clearance and Overseas Investment Office approval.
Aiming to make the regulatory process as smooth as possible, Ampol said it will divest in full its existing New Zealand business — Gull — to ‘fully ensure any potential competition law issues are fully addressed as a result of the Scheme.’
How does Ampol expect to fund the acquisition?
The utility stock expects the final funding mix to be largely debt-funded, supported by the divestment of the Gull business.
Ampol also flagged a potential new hybrid issue of up to $600 million but is committed to minimise the requirement for any new equity in the final funding mix.
What next for ZEL and ALD shares?
The market’s positive reaction to the news suggests investors see value-accretive potential in the acquisition.
In a presentation detailing the proposed acquisition, Ampol descibes Z Energy as a market leader in New Zealand with a trusted, iconic brand.
ZEL sells about 40% share of all fuel volumes across NZ through Z Energy and Caltex stores, with 80% of New Zealand’s population within 5km of a Z or Caltex service station.
Source: Ampol presentation
Ampol’s Chairman, Steven Gregg, commented on the rationale for the acquisition:
‘Z Energy is a logical growth opportunity for Ampol given it is the market leader in New Zealand and aligned with our international growth strategy.
‘The combined entity will be a Trans-Tasman leader in transport fuels and convenience retail, with greater scale and synergies supporting strong returns and earnings growth for our shareholders, whilst maintaining our commitment to financial discipline.’
Ampol thinks the ZEL deal promises ‘compelling financial returns’, estimating double-digit EPS accretion and over 20% free cash flow accretion from 2023 onwards.
Note that references to accretion benefits are pre-acquisition accounting adjustments at this stage.
The transaction is targeted for completion in the first half of 2022 with the Z Energy shareholder vote expected to occur early in 2022.
If the acquisition of Z Energy does lead to boosts to free cash flow and EPS, it could also positively impact Ampol’s dividend payouts.
ALD mentioned today it expects its capital allocation framework to include an ordinary dividends payout policy of 50–70% of RCOP NPAT (excluding significant items), fully franked.
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