Couche-Tard Says Europe Ripening Within Crisis

Couche-Tard Says Europe Ripening Within Crisis
Adding Statoil Fuel’s network of about 2,300 gas stations in Scandinavia, the Baltics, Poland and Russia will give Couche-Tard access to consumers in regions where growth is faster than in the struggling 17-nation euro area, while providing the company with a platform for future expansion. Photographer: Kristian Helgesen/Bloomberg

Alimentation Couche-Tard Inc., the Canadian convenience-store operator whose stock hit a record high yesterday, isn’t letting Europe’s debt crisis get in the way of its expansion.

Fresh from completing the $2.6 billion purchase of Norway’s Statoil Fuel & Retail ASA, the Laval, Quebec-based retailer is considering additional European acquisitions. Analysts such as Jim Durran at Barclays Capital and Perry Caicco at CIBC World Markets say Couche-Tard would probably be interested in Exxon Mobil Corp.’s German gas stations.

Statoil Fuel “will allow us to take a good shot at growth opportunities” in Europe, Couche-Tard Chief Executive Officer Alain Bouchard told analysts on a July 10 conference call.

Couche-Tard, which means “night owl” in French, has more than doubled in the past five years on rising earnings from its acquisitions across North America. Adjusted earnings jumped almost 10-fold to $2.42 a share in fiscal 2012 from 25 cents in 2003.

With a network of about 4,500 company-operated outlets that spans 42 U.S. states and all 10 Canadian provinces, Couche-Tard is Canada’s biggest convenience-store operator. The company has completed at least 40 acquisitions in North America since 2001, including the $804 million takeover of Circle K in 2003 from ConocoPhillips, according to data compiled by Bloomberg.

Couche-Tard’s Class B stock fell 41 cents to C$47.92 by 4 p.m. in Toronto today. Yesterday, the stock touched C$48.87, its highest price since the company began trading in June 1995.

Tops Tim

Couche-Tard has gained 52 percent in 2012, the best performance among the 12 members of the consumer staples sub-group of Canada’s benchmark Standard & Poor’s/TSX Composite Index. The S&P/TSX has declined 3.2 percent this year. Couche-Tard’s market value of C$8.58 billion is higher than Tim Hortons Inc., the country’s biggest coffee chain, and more than twice the size of BlackBerry maker Research In Motion Ltd.

Adding Statoil Fuel’s network of about 2,300 gas stations in Scandinavia, the Baltics, Poland and Russia will give Couche-Tard access to consumers in regions where growth is faster than in the struggling 17-nation euro area, while providing the company with a platform for future expansion.

“Statoil in and of itself is a pretty good acquisition, but it’s that much more valuable in Couche-Tard’s hands,” Izabel Flis, a research analyst at Bissett Investment Management in Calgary, said in a telephone interview. “Couche-Tard’s management is really well known for doing a fantastic job with acquisitions, integrating them and leveraging the larger scale that comes with them.”

Cash Available

Bissett and parent Franklin Templeton Investments owned about 516,000 Couche-Tard shares as of March, according to Bloomberg data.

Should other deals arise, Couche-Tard would have about $1.15 billion at its disposal, including cash on hand of more than $300 million and existing credit facilities of about $841 million, Chief Financial Officer Raymond Pare said July 10. He didn’t return a phone call seeking comment yesterday.

Exxon Mobil, the world’s biggest energy company by market value, is weighing a sale of its German Esso gas station chain, people familiar with the process told Bloomberg News this month. The unit, which includes more than 1,100 gas stations, may fetch more than 1 billion euros ($1.25 billion), said two of the people, who asked not to be identified because talks are private.

Barclays Capital’s Durran said in a July 5 note to investors he would support an acquisition by Couche-Tard of Exxon Mobil’s German gas-station assets “at the right price, subject to further due diligence.” Doing the deal would probably force Couche-Tard to issue stock, said Durran, who has an overweight rating on the company.

German Assets

Exxon Mobil’s German assets would represent an “attractive opportunity” for Couche-Tard, CIBC’s Caicco said in a July 10 report. He has a sector outperformer rating on Couche-Tard.

Brandon Snow, lead manager of the C$1.1 billion ($1 billion) Cambridge Canadian Equity Corporate Class fund, said he trusts Couche-Tard “to do only a deal that’s right. Obviously they’ve bitten off a very big chunk with Statoil, and they have a lot of work to do related to that transaction.”

Citing confidentiality agreements, Bouchard declined to identify possible targets during the July 10 conference call, noting that any deal in Europe would require patience.

“It takes months and months to strike a deal” in Europe, he said. “So I don’t see nothing big happening in the near future.”

Investment Grade

Bouchard also said the company is “certainly not willing to risk our investment grade. So we’ll be very careful there.”

Standard & Poor’s said April 19 it may lower Couche-Tard’s BBB- credit rating because of the additional debt. A decision will be made once S&P assesses Couche-Tard’s ability to reduce debt within 18 to 24 months. The BBB- rating is S&P’s lowest investment-grade ranking.

Couche-Tard is paying for its European foray with a three-year, $3.2 billion credit line and additional drawings on existing credit facilities. Couche-Tard said in April it expects to have adjusted net debt of $6.5 billion at the closing of the transaction, or 3.8 times earnings before interest, taxes, depreciation, amortization and rent. The company has said it plans to cut adjusted net debt to 3 times Ebitdar over 18 months with the help of free cash flow.

Couche-Tard is entering Europe at a time of crisis. The International Monetary Fund yesterday cut its global growth estimate for next year to 3.9 percent from an April estimate of 4.1 percent as Europe’s debt crisis prolongs Spain’s recession and slows expansions in emerging markets from China to India.

Even so, Couche-Tard’s track record of prospering from past acquisitions means investors such as Laura Wallace aren’t worried.

Low Risk

Wallace, part of a team that manages C$12 billion at the private client group of Bank of Nova Scotia, recently bought Couche-Tard stock in part because of the company’s European expansion. Bank of Nova Scotia is Canada’s third-biggest lender.

“Couche-Tard is a low-risk way of starting to play in Europe,” Wallace said yesterday in an interview at Bloomberg’s Toronto office. “Not everything in Europe is going to zero.”

Investors such as Snow and Sebastian van Berkom of Van Berkom & Associates say the Statoil Fuel deal will allow Couche-Tard to deduct interest payments both in Canada and in its new European division -- a procedure known as double dipping.

“There are a lot of financial synergies that come out of the Statoil transaction,” said van Berkom, whose Montreal-based firm manages C$1.8 billion and owns Couche-Tard stock. “The financing is very clever. There’s double dipping, plus they got additional financing at low rates. There is going to be a tremendous accretion to the earnings.”

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