Business Brief: Couche-Tard takes its shot

Good morning, this is Tim Shufelt, filling in for your usual inbox intruder, Chris Wilson-Smith, who is on vacation this week.

We start in Japan, where mass confusion is undoubtedly spreading nationwide over what exactly is a Couche-Tard, and why it is trying to conquer the world’s convenience retailing industry. Today, we take a closer look at the Quebec company behind the effort to take over the Japanese-based 7-Eleven chain and build a global convenience store colossus.

Up Top

• The shutdown of Canada’s railway network is widening ahead of possible lockouts or strikes on Thursday at both domestic freight haulers.
• Cogeco Communications Inc. has struck deals with an unnamed national wireless carrier and with Bragg Communications Inc.’s Eastlink that bring the Montreal-based telecom closer to launching cellphone service within its Quebec and Ontario market.
• After CI Financial Corp. for the first time surpassed $500-billion in assets under management in its monthly reporting, investors seem to be setting aside worries from earlier this year about how the company is paying for its audacious U.S. acquisition strategy.
• Solar and wind operations are set to bring in more than $54-million in tax revenues for Alberta municipalities in 2024, a 93-per-cent bump from just two years ago, according to an analysis by the Business Renewables Centre-Canada.

IN FOCUS

Couche-Tard’s bid for world domination

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Alimentation Couche-Tard Inc. is in empire-building mode. For decades, the company has been scooping up convenience store chains around the world. Now, it’s after the crown jewel of the industry – 7-Eleven. On Monday, Couche-Tard confirmed that it had approached Seven & i Holdings Co. Ltd., the Japanese parent of 7-Eleven, with a non-hostile takeover proposal. Let’s walk through some of the major facets of the move.

How big of a deal is this?

So big! The numbers alone are staggering. Adding the 7-Eleven chain would not only make Couche-Tard the undisputed world champion of convenience retailing, it would also make it one of the world’s largest retail operators period, with more than 100,000 stores. While specifics of the proposal weren’t disclosed, Raymond James pegged Seven & i’s value at nearly US$50-billion, which would make this the largest ever foreign takeover of a Japanese company. And it would immediately vault Couche-Tard to the highest echelon of Canadian corporations, counting it among the very largest by market capitalization.

Sounds like a lot of work. Why bother?

For decades, the company has established itself as a shrewd acquirer, predominantly growing through mergers and acquisitions. In 2003, it landed the deal that established a firm foothold in the U.S. market, buying the 2,300 store Circle K chain for US$821-million from ConocoPhillips. Growth by acquisition is a historically fraught approach. It’s common for serial acquirers to get so big, they need to stalk ever bigger game, and eventually they get sloppy. The corporate graveyard is filled with disastrous mergers. But Couche-Tard is in a different league. It’s been careful not to overpay. And for the most part, the company has stayed in its lane, said Brian Madden, chief investment officer of First Avenue Investment Counsel, and a long-time Couche-Tard shareholder. “All they’ve ever done is gas stations and convenience stores. It’s not rocket science. There’s not a lot of technological risk to it, or product obsolescence.”

Why now?

Couche-Tard was probably due for a big acquisition. In recent years, it has been rebuffed on some deals, others it walked away from. In 2021, the company bailed on its $25-billion bid to acquire European grocer Carrefour SA, partly over opposition from the French government. And there are a number of reasons why it’s a good time to try for such a big score. Couche-Tard’s balance sheet is in good shape. And the 7-Eleven parent company has been under pressure from an activist investor to improve performance, possibly making it more receptive to a takeover. “Nothing focuses the mind like having an activist up in your grill,” Mr. Madden said.

Hold your horses

Mountains will need to move to make this deal happen. Couche-Tard will need to take on billions in debt and may need the support of a strategic partner, Mr. Madden said. But from a financial perspective, it’s at least possible. Then there are the regulatory hurdles to overcome, which are substantial. The move puts 13,000 U.S. 7-Eleven locations in play, which added to the Circle K chain, would give Couche-Tard a combined 12.3-per-cent U.S. market share. “Some level of divestitures” would be required in the U.S. to get a blessing from regulators, Raymond James analyst Bobby Griffin said in a note. And then there is Japan’s protectionist streak, which has deterred foreign acquirers for decades. But changes are afoot. New guidelines have signalled that the door to foreign capital may be opening.

Read more: Alain Bouchard takes one more big swing to cement his Couche-Tard legacy

CHARTED

The hangover in Canadian housing lingers still. New credit data released by Statistics Canada on Monday showed residential mortgage growth sitting well below 4 per cent in June, year over year. That’s now a full year of sub-4 per cent growth, which is the slowest pace since the early 2000s. The big takeaway is that the Bank of Canada’s rate cut in June did little to revive housing activity. But as UBC professor Paul Kershaw argues, there’s nothing wrong with a stalled housing market.

THE OUTLOOK

On our radar and reading list

Today: Statistics Canada is due to release consumer price index data for July. The Street is projecting a rise of 0.4 per cent from June and up 2.5 per cent year-over-year. Numbers in that ballpark will only strengthen the case for the Bank of Canada to cut its policy rate in September.

Tomorrow: Speaking of rate cuts, the market also considers a September rate cut by the U.S. Federal Reserve to be a sure thing. On Wednesday, investors will get the chance to pore through the minutes from the Fed’s July meeting for clues on where the central bank is headed.

Carl Icahn was severely punished for failing to disclose billions of dollars in personal loans secured against his company’s stock as collateral. Just kidding, of course. Icahn is personally on the hook for US$500,000 in civil penalties, putting a 0.01 per cent dent in his US$5-billion fortune.

Morning markets

Global markets were mixed in cautious trading, as investors considered whether the U.S. Federal Reserve could offer further hints of imminent interest rate cuts later this week at the Jackson Hole symposium. Wall Street and TSX futures were little changed on the heels of an extended rally.

Overseas, the pan-European STOXX 600 was flat in morning trading. Britain’s FTSE 100 gave back 0.72 per cent, Germany’s DAX declined 0.02 per cent and France’s CAC 40 rose 0.12 per cent.

In Asia, Japan’s Nikkei closed 1.8 per cent higher, while Hong Kong’s Hang Seng dipped 0.3 per cent.

The Canadian dollar traded at 73.47 U.S. cents.