We reduce our fair value for Z Energy by 33% to NZD 3.78, in line with the Ampol’s bid. The decline in value is in accord with the terms of a proposed merger and our prior stand-alone fair value estimates. Merger and acquisition activity continues at a frenetic pace in the Australasian fossil fuel space, coronavirus fragility and carbon concerns marking some as prey. This time it has moved downstream to the refined fuel retail segment. Ampol is proposing an NZD 3.78 per share cash offer for Z Energy via scheme of arrangement. Australia’s largest refined fuel retailer has been granted a four week-exclusivity period in which to undertake due diligence prior to formalising the offer for its smaller New Zealand counterpart. Ampol is also considering an option to include a partial share consideration and secondary listing on the NZX.
Despite there being no certainty that discussions will result in a binding agreement, we think the chance of success is high. The latest is apparently the fourth in a series of non-binding offers from Ampol, including at NZD 3.35, NZD 3.50, and NZD 3.60 along the way. And there is logic to a merger–Ampol and Z have very similar business models. Z Energy’s board wouldn’t have opened the books if the chance of a deal proceeding was low. At NZD 3.78 Ampol will be getting Z Energy at a material 33% discount to our NZD 5.60 stand-alone fair value.
Our formal recommendation for Z shareholders is don’t accept, based solely upon the offer’s material discount to our NZD 5.60 standalone fair value. However, we suspect that advice is likely to prove academic. Z shares rose just over 14% on the day to NZD 3.48, though still 8% below the proposed bid level. They have moved just into 4-star territory from 3-star prior.
Ampol intends to fund the acquisition via a combination of new debt, potential divestments, and an equity issuance in the order of AUD 600 million. The equity issuance may take the form of partial share consideration to Z shareholders.
