In one of the biggest takeover deals of recent years, Z Energy is snapping up Caltex in New Zealand for $785 million, creating a giant with almost half of the fuel market.

That could be "potentially dangerous" for competition and pump prices, according to rival Gull boss Dave Bodger.

But investors cheered on the deal, with Z shares rocketing up more than 21 per cent to $6.20.

Craig Bates Caltex has been bought by Z Energy for more than $700 million.

And the Automobile Association is also concerned about the possible impact of the mega-deal on drivers. The industry has been making significantly higher profit margins in the past few years, influenced by Z Energy, which is on the verge of becoming even more dominant.

Z Energy has about 27 per cent of the fuel market and combined with Caltex and their supplies to Challenge stations, its share would reach 49 per cent.

Z said it would continue with the Caltex brand.

"It is the most exciting and the most scary thing I've ever done," Z Energy chief executive Mike Bennetts said on Tuesday, after signing off the deal late on Monday night.

"We think we have bought well", with a target to settle the deal by the end of November, pending approval from the government's monopoly watchdog. Z expected "synergy benefits" of between $15m and $25m a year from the deal from 2017 onwards.

Bennetts said they were "as confident as we can be" in the application made to the Commerce Commission. "There are strong grounds for clearance".

Z believed there would be "no lessening of competition" between retail service stations, either within 2kms or 5kms of existing stations. It was also "nonsensical to take two strong brands and make them one," Bennetts said.

An analyst said the Z deal would leave the market dominated by the three big players, Z, BP and Mobil with a combined share of around 90 per cent.

So approval for the deal by the Commerce Commission may be no certainty, but was not "doomed to fail" either a competition lawyer said just because it was outside what used to be called the "safe harbour" guidelines for an acceptable market share.

Gull's Bodger said: "It's potentially dangerous where there is already reduced competition, for some markets, small markets" . But that was what the Commerce Commission was there to look at.

If Z bought Caltex there would be just one wholesaler controlling markets a lot more, in areas where there were only Z and Caltex stations.

"I'm confident the people at the Commerce Commission will have a damn good look at this," Bodger said.

In such big mergers there was often the need to "protect the consumer" in affected markets he said.

But if there was a takeover, there may be a greater opportunity for Gull which was looking to expand with another eight sites including the lower North Island and Taranaki.

AA analyst Mark Stockdale said Z's deal to buy Caltex stations may give the combined group greater power to lift prices and raise profit margins.

"Whether that lessens competition, that's a question for the Commerce Commission to answer," he said.

Fuel profit margins had been relatively low for the past couple of decades but had improved substantially since Z started up and took over the Shell business five years ago.

The AA was concerned about the greater market share that Z would hold and the concentration of the market with just three big players.

"Z will become the dominant fuel supplier in New Zealand, supplying 49 per cent of the retail network. That has the potential to give them significant clout," Stockdale said.

And Z had been forthright that profit margins needed to rise.

"They will be able to influence prices even further (with Caltex). They won't be able to control the retail price at Caltex, but they will control the wholesale price," Stockdale said.

But Bennetts was categorical that prices would not go up for drivers if Z and Caltex became a much bigger company.

"No. There are more than a dozen retail brands in New Zealand. And even within Caltex you have pricing decisions made by 146 independent family business and a further 90 Challenge sites," Bennetts said.

John Land, a senior commercial litigation barrister at Bankside Chambers and a competition law specialist, said the Z takeover of Caltex was outside what used to be called the Commerce Commission's "safe harbours" guidelines, now called "concentration indicators".

There was a concentrated market when the three biggest players had more than 70 per cent of the market.

But the fact that Z would be outside the concentration indicators did not mean the deal was "doomed to fail" because the Commission would look at a number of competition factors.

The test is whether the deal would "substantially lessen competition" or if it would be likely to do that.

"Would the merged company be able to raise prices by a significant degree as a result of the merger, because they had such a dominant share?" Land said. The Commission would also consider the impact market going from four big players to three.

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