Genesis Energy is buying Nova Energy's retail lpg business for $192million and Forsyth Barr broker Damian Foster is questioning the price.
Transactional costs and other one-off costs meant the acquisition price was closer to $200million, he said yesterday.
The 2018 financial year operating earnings contribution was likely to be $17million. A headline profit multiple of 11.8 times made the deal look expensive.
``Strategically, we like the deal but question the price. The deal is 100% debt funded - Genesis is launching a new bond issues - so gearing levels are getting high. That said, the nature of the bond deal means there is no credit rating risk. The bond will get a 50% equity credit.''
Overall, the deal was not likely to move the share price much, Mr Foster said.
Forsyth Barr had a current neutral rating on Genesis and a target price of $2.15. The shares last traded at $2.13. The company is 51% owned by the Government, following a sell-down before the last election.
Genesis chairwoman Dame Jenny Shipley said in a market announcement the transaction built on the company's recent successful organic growth in lpg over the last 12 months.
The purchase would increase Genesis' market share from 3% to 19%.
``It will significantly accelerate our growth aspirations in the key lpg market with our announced strategy which the company outlined last year.''
Chief executive Marc England said the Nova acquisition was the second significant transaction the company had made in the past year and it was great news for customers.
By growing its lpg business, the company could keep innovating in ways to benefit customers throughout New Zealand.
Genesis had a unique position in the industry, combining three fuels on one billing, he said.
``In every respect, today's announcement represents a big addition to the Genesis Energy family.''
It meant 23 depots throughout New Zealand, two reticulated networks in Dunedin and Christchurch, and 68 vehicles servicing 35,000 lpg customers.
The transaction was conditional on limited due diligence and other conditions. It was expected to be completed by May 31. A transition period would enable handover and rebranding, which was expected to be completed on July 31.
The transaction would also improve Genesis' exposure to the ``attractive'' demand dynamics of lpg, particularly in the 45kg and bulk segments which now made up 75% of the market and had been growing strongly, Mr England said.
Nova's lpg distribution network complemented Genesis' customer base as well as removing barriers to growth in new market segments such as bulk and small to medium businesses (SMEs).
