Ardova Plc, one of Nigeria’s largest oil marketing firms announced last week that it had completed the acquisition of Enyo Retail and Supply Ltd. The deal was first announced in January 2020, just four months after it obtained the approval of its board to acquire downstream assets.

According to, the MD/CEO of Ardova Plc, Olumide Adeosun, the deal is meant to produce a stronger downstream energy group and stronger financial results. “On completion, this acquisition will lead to a stronger downstream energy group that benefits from the increased customer reach and service delivery excellence of both companies, with the combination expected to produce stronger financial results,” he said.

Mr Adeosun used the word “Stronger” twice on both occasions as an adjective buttressing how positive he feels about the deal. We admire this optimism but of particular interest to us is the expectation that the deal will produce “stronger financial results” post-acquisition. Whilst that is a more than welcome outcome for an acquisition it is a very risky bet.

Ardova operates in a very competitive market with very low margins and little upside for growth. The downstream sector is also largely controlled by NNPC who imports over 90% of petroleum products. The sector’s most popular product, PMS, is heavily subsidized and burdened by controlled pricing and an inefficient supply chain.

In the first 9 months of this year, Ardova reported top-line revenue of N136.1 billion out of which it kept just 7.5% as gross margin. Fuel, which represents 86% of revenues almost perpetually delivers single-digit margins. To boost returns, you have to sell a lot of fuel which perhaps explains why it is gobbling up market share. It appears the company is strategically positioning for market share in fragmented sectors dominated mostly by smaller but agile players. It could also be preparing ground to increase market share for retail outlets which could be a major factor when the Dangote Refinery comes onstream.

Whilst these are lofty ambitions the risk and reward don’t seem to match, at least based on what we know. Ardova is still struggling to deliver ample returns on equity since the takeover by its new owners. Return on average equity is on the borderline of 10% and could fall lower following this acquisition which we believe Ardova is funding via debt. Current debt is around N11.1 billion and is expected to rise following its recently completed bond issuance. More loans on its balance sheet means higher finance costs and further pressure on an already lean profit margin (6.7%).

Its return on assets of about 3.3-3.5% means profits will decline even further if it fails to boost topline revenue growth after sucking in more loans. This year, revenue has risen by just 5.85% in what its CEO explains as “successfully adopting a lean approach whilst maintaining efficiency in company operations” suggesting cost-cutting is where it hopes to widen margins. Hard to see how this will remain after it successfully loaded up N25.3 billion in Series 1 bond issuance. Ardova plans to borrow up to N60 billion in bonds, suggesting there is room for more acquisitions.

We like corporate deals that portend significant value for shareholders. Ardova opines this will deliver value for shareholders and improve the bottom line.

“Overall, we are confident that the capital-intensive investments made will promote the company as a household name with regard to energy in the nearest future. The progress we have achieved in the last nine months are clear indicators of our determination to offer star experience for our customers through consistent innovation and strategic partnerships to ensure process refinement and operational efficiency. We remain focused on building an efficient downstream integrated energy company that is well-positioned to drive profitable growth and create long-term value for shareholders.” – Ardova

The taste of the risk is in its reward.