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Australia’s competition regulator has blocked BP’s $1.3bn acquisition of more than 500 fuel stations from Woolworths in a setback for the UK group’s international retail expansion.

The deal, which would be BP’s largest downstream acquisition for more than a decade, was part of a drive to increase profitability and growth from its filling stations around the world by partnering with convenience store chains.

The Australian Competition & Consumer Commission said the deal would lead to higher petrol prices for consumers.

BP pioneered its retail partnership model in the UK, where about 300 of its petrol stations include Marks and Spencer food shops, and has sought similar tie-ups in other markets.

The strategy has helped BP increase margins from its filling stations, which in turn have become among the strongest sources of growth in the group’s downstream business, which spans refining to marketing.

BP had aimed to replicate its UK success in Australia by buying 527 filling stations from Woolworths, the country’s largest grocery chain and a big fuel retailer.

But the deal, announced last December, faces a regulatory roadblock after a year-long review by the ACCC concluded it would “substantially lessen competition in the retail supply of fuel”.

The regulator found that prices at BP petrol stations were “significantly higher” than those of Woolworths in big Australian cities; BP prices were 3 per cent above the market average in Sydney, for example.

“Many consumers seeking out cheaper petrol will head to Woolworths petrol stations,” said Rod Sims, chairman of the ACCC. “We believe that fuel prices will likely increase at the Woolworths sites if BP acquires them and other retailers would then face less competitive pressure.”

Both companies said they were disappointed by the decision and would consult lawyers on their next steps. People involved in the process said BP was still committed to the deal and hopeful of overcoming the ACCC’s objections.

“We remain confident that, with appropriate divestments as offered by BP, this transaction would not substantially lessen competition,” said Andy Holmes, president of BP Australia.

BP and Woolworths had originally hoped to close the deal by next month.

Brendan Warn, analyst at BMO Capital Markets, said the Australian expansion was “important, but not critical” to BP’s retail growth plans.

Other markets where BP is expanding its retail presence include Indonesia and Mexico, where it has opened 100 filling stations since entering the market this year, with plans for 500 by the end of 2018.

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