Alimentation Couche-Tard Inc., North America’s largest convenience store owner, chalked up its highest stock price this week as solid quarterly results combined with a takeover bid for Asian expansion.
The Laval, Que.-based company has made a $7.7 billion proposal — its largest ever — to buy Caltex Australia Ltd., which has 800 fuel stations and shops. Couche-Tard this week reported second quarter profit rose 21.5 per cent to US$579.4 million compared with US$477 million a year earlier.
Same store sales in the U.S. expanded 3.2 per cent among its Circle-K brand outlets, beating some expectations. Couche-Tard has some 9,800 convenience stores in North America and thousands more from Scandinavia to New Zealand.
The stock hit an all time high of $44.50 on the Toronto Stock Exchange Nov. 28 before easing to $43.88 on Friday, showing how analysts and investors are backing the giant retailer’s plans.
“The acquisition, if consummated, would bring Couche-Tard into a new geography and serve as a platform for further expansion into the Asia-Pacific region,” Mark Petrie and Krishna Ruthnum, analysts at CIBC in Toronto, wrote in a Nov. 28 report. The duo raised its target price on the stock to $50 and kept its outperformer rating.
Cannaccord Genuity analyst Derek Dley also sees the Caltex offer as a ramp into Asia, though he cautioned the price might be too high and not all of Caltex’s assets are needed.
“The refinery and wholesale business appear to be non-core to us, and we believe Couche-Tard would look to divest these assets over time and retain the retail network,” Dley wrote in a Nov. 27 report.
“While we believe Couche-Tard has a solid track record as an acquirer, we are not quite convinced on the strategic rationale of purchasing the entire asset at a high single-digit multiple,” Dley said, referring to a calculation of Caltex’s value and earnings.
Even with widespread support for the expansion plan, Couche-Tard CEO Brian Hannasch said the company will continue to focus on the large U.S. market.
“Despite our size, it’s a massive market, a healthy economy, healthy consumers, and it’s probably the market where we can achieve the greatest synergies,” Hannasch told a conference call this week.
The Caltex opportunity would tie into how Australia resembles the stability of Europe, where Couch-Tard has some 2,700 outlets, and acts as a gateway to the promise of Asia, where the CEO said he expects most of the world’s economic growth to occur over the next 20 years.
“We see Caltex as a potential springboard to expand our presence in Asia Pacific should the Caltex board choose to engage with us on a proposal,” Hannasch said.
The takeover talks are in early stages and Caltex might opt for other scenarios, some analysts said.
One option might be for Caltex to pursue stock market listings for some property assets to generate more value for shareholders, analysts at Macquarie wrote Nov. 28. Its board would likely prefer the higher value from a listings route instead of a sale, but the gap between the concepts “may generate an interloper bid to close this spread,” Macquarie said.
Likewise, Credit Suisse said splitting up the company and selling the parts could be valued at as much as $11.7 billion — $4 billion more than Couche-Tard’s offer. Under that scenario, Caltex’s fuels and infrastructure division would be spun off, its retail properties sold and its convenience-retail arm sold, the bank’s analysts said.
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