Z Energy argues purchase of Caltex won't drive up pump price

Z Energy argues purchase of Caltex won't drive up pump prices or reduce competition

By Jonathan Underhill

July 1 (BusinessDesk) - Z Energy, the listed service station chain, said its planned $785 million purchase of rival Chevron New Zealand's Caltex-branded network won't drive up prices at the pump because the target doesn't have retail price-setting power and the market will remain highly competitive.

Z Energy makes the argument in its application to the Commerce Commission for clearance to buy the rival, a public version of which was published today. Parts of the application have been redacted, including details of commercial sales of aviation fuel, where it notes that Z Energy and Chevron only overlap at Auckland International Airport, marine fuel oils, where it says Chevron isn't a significant player, and bitumen, where it notes that imports help constrain prices.

It says there would be no reduction in competition in commercial sales of petrol and diesel because independent distributors and retailers will retain a choice of two alternatives to their existing wholesale supplier in BP and Mobil, and potentially in the North Island, a third in Gull.

Z sees no increased market power in truck stops, which it says are in "abundance".

The petrol station chain joined the NZX in 2013, when Infratil and the New Zealand Superannuation Fund sold down their stakes in an initial public offering that raised $840 million. The company has said it is committed to running a multi-brand strategy following the acquisition of the Caltex and Challenge! brands from Chevron, a deal that would give it some 49 percent of the retail petrol station market.

It cites analysis of retail pricing data by Jerry Hausman, professor of economics at the Massachusetts Institute of Technology, to argue that the removal of Caltex as an independent brand "is unlikely to result in a statistically significant price rise in a given geographic area (based on local markets with a radius of 5km and even 2km)."

Chevron's retail operating model means that "it does not have contractual ability to set retail pricing, which limits its competitive influence in the retail market. This would continue both under Z ownership," Z Energy says in its application. The retail market would remain "highly competitive", with "a broad range of retail fuel ownership structures, which gives rise to distinct pricing incentives and manifests in a variety of service offerings."

Midstream participants would be reduced to three from four, but that wouldn't hurt competition because of governance arrangements in relation to key shared assets, such as the refinery-to-Auckland and Wiri-to-Auckland Airport pipelines.

"Fourteen brands, including Gull and Foodstuffs, will continue at the retail level, with meaningful pricing independence from the 'midstream participants'," it said.

Z Energy has a 26 percent share of New Zealand Refining, operator of the nation's only oil refinery, although the deal won't increase that holding because Chevron sold its 11 percent stake into the market. Z has previously said it expects to benefit from acquiring Chevron's business through procurement, operating cost and supply chain efficiencies.

Z Energy shares were unchanged at $5.85 and have gained 26 percent this year. Infratil, which owns 20 percent of Z Energy, last traded at $3.155 and has gained 7.2 percent this year. The NZ Super Fund also owns 20 percent of Z Energy.

A Caltex factsheet says it has 147 outlets in New Zealand, supplies fuel to the aviation and shipping industries and is a partner in the AA Fuelcard loyalty scheme. Z Energy is a shareholder in the rival FlyBuys scheme and its website says it has more than 200 outlets.

According to the Commerce Commission's website, a decision on the application is due by July 15, although it says the date is likely to be extended.

The deal is also subject to approval from the Overseas Investment Office.

(BusinessDesk)

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