Gas station billionaires weigh biggest ever deal in Caltex

Britain’s billionaire Issa brothers built one of the world’s largest independent gas station chains through a series of debt-fueled purchases. Now they’re weighing their biggest-ever acquisition.

EG Group, the U.K. company led by Mohsin and Zuber Issa, is working with a financial adviser as it evaluates making a bid for Caltex Australia Ltd., people with knowledge of the matter said. Any offer for the $6 billion company could start a takeover battle with Canadian convenience-store giant Alimentation Couche-Tard Inc., whose initial bid for Caltex was rejected.

The string of deals has turned closely held EG Group into a global giant with about 5,000 fuel station and convenience store sites across Europe, North America and Australia. The Issas have come a long way from their humble origins in 2001, when they bought a single gas station in an old mill town outside Manchester.

Ratings agencies have raised concerns about the pace of acquisitions, with Moody’s Investors Service warning in August that realizing synergies will be important given the high prices EG Group paid. The company’s high leverage means that its current credit rating won’t support more debt-funded acquisitions until there is “clear evidence” of achieving cost-saving targets, Fitch Ratings wrote in December.

EG Group has about 7.3 billion pounds ($9.6 billion) equivalent of debt, according to data compiled by Bloomberg.

In less than three years, EG Group has been transformed from a “small, entrepreneurial group” into a major global fuel and retail operator, according to Fitch. While EG Group has a track record of swiftly integrating acquisitions, it has needed needed to improve the way it oversees the wider company, it said.

Buying Caltex would bring a network of about 2,000 sites across Australia. Caltex last month rejected Couche-Tard’s latest offer of A$8.6 billion ($5.9 billion) as too low, saying it undervalued the Sydney-based company.

Couche-Tard, which owns the Circle K chain, had already raised the bid to A$34.50 per share in cash from its original proposal of A$32. Still, Caltex left the door open to a deal, saying it would give its Canadian suitor access to select non-public information to allow it to improve its offer.

EG Group, whose backers include TDR Capital, hasn’t made a final decision on whether to bid for Caltex, and there’s no certainty it will proceed with a firm offer, the people said. Representatives for EG Group and Caltex declined to comment.

EG Group was formed in 2016 when Euro Garages, run by the Issas, merged with TDR’s European Forecourt Retail Group. The U.K. company agreed in July to buy Cumberland Farms, gaining 600 locations in a deal that made it the fifth-largest independent convenience store operator in the U.S.

The company last year completed the A$1.73 billion purchase of 540 Australian fuel convenience sites from Woolworths Group Ltd. In 2018, EG Group spent $2.15 billion to acquire Kroger Co.’s U.S. convenience store business.

EG Group’s increasing scale and geographical diversification are important at a time when motorists are gravitating toward electric cars and other gas-saving technologies.

The company has focused on the higher-margin convenience store side of its operations, along with takeaway food, as the volume of fuel sales declines. EG Group has partnerships with brands including Burger King, KFC, Starbucks and Subway to run franchises at its gas stations.

A proposed listing could also give EG Group more capital to expand. The company is considering an initial public offering that could value it at more than 10 billion pounds, people with knowledge of the matter said in October. It has been in early discussions with banks, though no formal mandates have been awarded, according to the people.