Total SA and Italian major Erg might end their partnership for retail and distribution network of petroleum products in Italy. The two companies have formed a partnership in Italy, TotalErg.
The sale process is expected to start late next month. Although no detail about assets to be divested has been disclosed as of yet, market experts expect the value of the deal to come in at $781 million or 700 million euros.
No other details about the asset sell-off have been disclosed yet. The energy companies are yet to decide whether they would offload their non-core businesses in the country. Apart from the pump stations, the joint venture conducts sale of petroleum products in Italy and also owns a number of refineries.
Italy’s Distribution Network
In Italy, there are around 21,000 petrol stations. The industry is “over-crowded” as it is twice the size of France. Though a large number of stations positively affect the level of competition in the industry, they adversely affect the prices of petroleum products. Moreover, the high number of retail stations also create mismatch between supply and demand.
According to news sources, to make the industry more efficient and to restore balance between petrol demand and supply, the Italian government is making efforts to cut the number of service stations. The government has recently drafted a bill to reduce the number the stations.
Total Erg–Break up Soon?
TotalErg was formed in 2010 through a merger between Erg Petroli and Total Italia. While the French oil company owns 49% stake in the joint venture, Erg has 51% interest in the company.
TotalErg currently owns 2,600 petrol retail stations in Italy; this makes a total market share of 11%. The joint venture is the fourth largest service station network in the country, just after Kuwait Petroleum International. ENI is the leading player in the industry.
According to Reuters, when the merger was finalized, Erg’s ex-CEO Alessandro Garrone said the agreement is formed for 30 years to show long-lasting commitment to the project. However, now as market conditions have changed, the venture is expected to end soon. According to news sources, both companies have mutually agreed to call off the deal.
Moreover, as Erg is continuously shifting its focus from traditional energy sources to renewable energy resources, the company has indicated its intention several times to divest its petrol distribution business. The company believes the segment is no more in line with its long-term strategy.
Earlier this year, the Garrone family-led company had hired HSBC to look for alternatives to exit the industry. Total had also hired Rothschild to evaluate strategies to end the merger. The official decision is expected to be announced in the coming weeks.
Downstream Segment – Divestiture at its Peak
The move by Total and Erg comes two years after Shell sold its 830 petrol stations in the country. TotalErg is also expected to follow in the footsteps of the Anglo-Dutch oil giant in the near future. The asset offloading in the industry has increased in the past few months.
Since the arrival of June 2014, crude oil prices have dropped by more than 50%. As low oil and gas prices have adversely impacted the sales revenue of the exploration and production (E&P) segment, the financial position of the energy companies has deteriorated. Thus, to improve their cash flow position and reduce their debt burden amid weak commodity market conditions, the energy companies have slashed their capital and operating spending by billions of dollars. The companies have also offloaded their interest in non-core assets to generate funds for their future expenditure and to improve their asset base.
As the upstream segment has suffered the most in the past few months, most of the buyers in the industry are currently interested in buying assets in the refining, marketing, and distribution segment. Although the refining margins have also declined in the recent past, the downstream assets are still more attractive than E&P assets.
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