Viva Energy pays $137m to extend fuel partnership with Coles Express outlets

Australian energy company Viva Energy (ASX: VEA) will make a one-off payment of $137 million to extend its fuel and convenience partnership with Coles Group (ASX: COL) and retain the right to set retail fuel prices at Coles Express outlets.

Under the terms of a revised Fuel and Convenience Alliance agreement between the two companies, Viva will assume full responsibility for the provision of fuel offerings including retail fuel pricing and marketing across the alliance network through to 2029.

Viva will receive the retail fuel margin and Coles will receive a commission per litre based on fuel volumes achieved.

The move to a commission model means Coles will no longer have direct exposure to retail fuel price fluctuations.

The company will continue to provide a convenience service under the Coles Express brand, managing customer interactions and incentive programs such as fuel docket discounts and Flybuys.

Viva will receive an enhanced royalty on convenience sales and will continue to receive lease and licence fees associated with Coles Express’ right to occupy the sites.

The terms of the revised alliance are not subject to any conditions precedent and are expected to come into effect in early March.

Core competencies

Viva chief executive officer Scott Wyatt said the revised agreement will allow each party to leverage their core competencies in a competitive, integrated offering.

“The new alliance will provide a more consistent and competitive fuel offer across the Shell-branded network and better optimise [Viva’s] nationwide supply chain and refining businesses,” he said.

“It signals a significant step forward in our long standing [partnership] with Coles Express.”

The Viva-Coles partnership is currently Australia’s largest single branded and operated fuel and convenience offering, combining the Coles Express brand with Viva’s nationwide retail service station network.

Financials

Once the revised alliance agreement takes effect in March, Coles said it expects 2019 financial year earnings before interest and tax for its Convenience business to be in the order of $50 million.

Coles and Viva anticipate volumes to grow over the medium to long-term, with future Coles Convenience earnings expected to be lower than the segment has reported in the past after moving to the “commission-per-litre” model which reduces volatility in earnings.

For its part, Viva expects to reinvest its acquired fuel margin over the remainder of 2019 to increase the competitiveness of its fuel offers, progress a range of new marketing initiatives and improve sales growth through the alliance platform.

The company said volume and improved fuel margins are expected to underpin future growth in earnings from its Retail business.

At midday, shares in Viva were up 12.99% to $2.175, with service station properties holder Viva Energy REIT (ASX: VVR) gaining 2.21% to $2.31.

Shares in Coles were down 1.89% to $12.49.