Alimentation Couche-Tard Inc. ATD-T is reportedly exchanging proposals in a multibillion-dollar combination with a British retailing giant that would feed its growth ambitions.
The Wall Street Journal recently reported that talks between the owner of Circle K and privately held EB Group would value the latter at about US$16 billion or more including debt. That’s about US$1 billion more than was suggested in September when the deal was first reported.
The combined company would be headquartered at Couche-Tard’s base in Laval, Que., and have over US$70 billion in annual revenue and 21,000 fast-food joints, gas stations and grocery stores in more than 30 countries.
The newspaper said people familiar with the matter cautioned that talks may not result in a deal.
Alimentation Couche-Tard (ATD) couldn’t be immediately reached for comment.
Analyst Irene Nattel of RBC Dominion Securities said a combination of two of the world’s largest convenience-store chains would be a “compelling potential transaction” and one that is consistent with Couche-Tard’s five-year plan to double its size.
“Alimentation Couche-Tard has always been highly disciplined on M&A valuation and we would expect management to apply even more heightened financial oversight in the current environment, and for large-scale transactions,” she wrote in a note to clients.
Nattel added that Couche-Tard could include partners to satisfy competition issues, notably in the U.S.
Analyst Chris Li of Desjardins Capital Markets also believes EG “would be a good strategic fit” and that Couche-Tard will be “highly disciplined.”
He said a deal would generate immediate low single-digit percentage increase to earnings per share with no synergies, and up to high teens increase with cost savings over three years.
Li said the synergies would vary by geography. They would be significant in the U.S. where Couche-Tard has about 7,150 sites and EG has some 1,700 locations. But savings would be limited in Europe because of a lack of overlap with Couche-Tard’s presence strongest in Northern Europe and some other countries while EG is focused on the U.K. and Western Europe, along with Australia.
“We believe ATD could realize meaningful synergies by leveraging its increased scale and applying its existing fuel margin improvement initiatives (fuel rebranding, pricing optimization, network and product optimization, and sourcing and logistics),” he wrote in a note.
Li added that EG’s assets could benefit from increased sales of food, which has been a focus for Couche-Tard.
While a transaction would face scrutiny from U.S. regulators, he doesn’t expect antitrust to be an issue because EG’s 762 Kroger convenience stores are spread across 19 states, most of which are outside ATD’s top states.
Regulations may be tougher in France and Italy. However, Li said Couche-Tard may view these challenges as manageable following its attempt to buy Carrefour.
Meanwhile, Couche-Tard would be expected to be in the running if an activist investor in Suncor Inc. is successful in pushing the Canadian oil giant to sell its Petro-Canada retail portfolio, Nattel wrote in a separate report.
She said Elliot Management pegs the value of Suncor retail assets at $8.5 billion to $12 billion, while she puts the value at about $9.5 billion.
“With just under 300 existing stores in Western Canada, ATD would be well-positioned to bid for the Western Canada network, but would likely butt up against competition bureau constraints, most notably in the province of Quebec and on a market-by-market basis in Ontario, suggesting a partner might be required.”
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