Couche-Tard president Alain Bouchard outside a store in Blainville, Quebec on May 29, 2019. For the first time in an illustrious 44-year career, investors should be asking if Mr. Bouchard risks overpaying to grab a long-coveted prize.Hugo-Sebastien AUBERT/The Canadian Press
What happened to the Alimentation Couche-Tard Inc. ATD-T executive team known for their financial discipline?
Alain Bouchard, billionaire founder and executive chair of a global convenience store chain, forged a sterling reputation in takeover circles by making a series of smart acquisitions and – just as importantly – avoiding bad deals. In recent years, Couche-Tard shareholders were well served by Mr. Bouchard and his team’s decision to walk away from purchases in the U.S. and Australia when the price got too rich.
Mr. Bouchard now seems bent on buying Japanese 7-Eleven parent Seven & i Holdings Co. If its US$47-billion-plus bid is successful, Couche-Tard plans to borrow the bulk of money needed to pay for the all-cash acquisition.
The way Mr. Bouchard and other Couche-Tard executives talk about buying 7-Eleven, and the debt levels they are willing to shoulder, is far more aggressive than how the company has approached past acquisitions.
Buying 7-Eleven, an underperforming retailer in recent years, would be a legacy-defining way for Mr. Bouchard to finish a career that began with humble Quebec roots and a single store in the Montreal suburbs.
The takeover could also be a financial disaster if Couche-Tard takes on too much debt. For the first time in an illustrious 44-year career, investors should be asking if Mr. Bouchard risks overpaying to grab a long-coveted prize.
Mr. Bouchard, 75, has been chasing 7-Eleven for two decades, intent on creating the world’s largest chain of corner stores. He’s never been able to get the Japanese company’s board to engage in takeover talks.
By targeting 7-Eleven, Couche-Tard is attempting the largest foreign takeover of a Japanese company. The offer needs to overcome resistance from a historically insular Asian market. To signal that Couche-Tard remains serious in its pursuit, despite having its two initial offers rebuffed, chief executive officer Alex Miller told The Globe and Mail last week: “We’re not going away. We see tremendous value here and we are just going to continue to highlight that and to push … we’ll get this deal.”
Mr. Miller took the top job at Couche-Tard in September, making this his first big deal as boss. The former BP PLC executive joined the company in 2012.
In the same interview, Couche-Tard chief financial officer Filipe Da Silva said the company plans to fund the takeover with minimal stock sales. Instead, Couche-Tard will borrow from banks and issue bonds, pushing debt to a multiple of earnings before interest, taxes, depreciation and amortization (EBITDA) far higher than the four times EBITDA taken on in past takeovers. Mr. Da Silva said: “We have the capacity to stretch the leverage of the company.”
Mr. Da Silva has reason to be confident. Couche Tard is a cash-generating machine, and it would be borrowing at a point in the credit cycle when interest rates are falling. This year, RBC Capital Markets analyst Irene Nattel projects the chain’s 16,000 stores will ring up $7.1-billion of EBITDA. By 2028, the company forecasts EBITDA will hit $10-billion. That much cash can cover interest payments on a whole lot of debt.
Based on recent takeover activity, with large borrowers like Rogers Communications Inc. quickly paying down deal debt, banks and bond funds would fall over themselves to lend Couche-Tard all the money it wants.
It’s hard to argue against Mr. Bouchard and this management team. Their track record on acquisitions is second to none.
However, those with long memories can recall Canadian entrepreneurs who blew up their companies by borrowing too much, at the wrong time. In the 1980s, Robert Campeau drove his company into the ground with ill-timed acquisitions of two U.S. department store chains. In the 1990s, Paul Reichmann went bust by getting too deeply into debt at real estate developer Olympia & York.
If Couche-Tard wins 7-Eleven, and the deal takes a year or two to receive regulatory blessing, it’s easy to imagine a scenario where everything goes the company’s way. The economy keeps humming, consumers keep stopping by for snacks and interest rates keep dropping. As the combined chains squeeze billions in costs out of their stores, this takeover could be home run from Mr. Bouchard and investors.
It’s also possible to build the case for consumers finding far few reasons to stop by Circle K and 7-Eleven, as a recession hits, or drivers embrace electric vehicles and make fewer stops at gas stations. Even a small increase in interest rates can wreak havoc on a balance sheet with tens of billion in debt.
Couche-Tard executives are trying to win 7-Eleven by showing their determination to buy their rival. But there’s a price for this takeover where Mr. Bouchard would win by walking away.