Deals

Brooke Sutherland is a Bloomberg Gadfly columnist covering deals. She previously wrote an M&A column for Bloomberg News.

Ted was right: Strange things are afoot at the Circle K.

Alimentation Couche-Tard -- the owner of the convenience store whose time-traveling phone booth featured in the 1989 stoner classic "Bill & Ted's Excellent Adventure" -- is buying U.S. gas-station chain CST Brands for $4.4 billion.

The pairing of the two companies isn't surprising (more on that later), but the target's stock-price reaction in light of the news is somewhat unusual. Instead of rising toward Couche-Tard's offer price, CST dropped slightly in early trading on Monday. As of mid-morning, it was essentially flat. And in another curiosity, Couche-Tard's shares soared more then 7 percent. 

Dude
CST shares were at best flat after the company announced its sale to Couche-Tard.
Source: Bloomberg

Strange, yes, but understandable. The $48.53 bid falls well short of what many analysts have targeted as an appropriate valuation. Just last week, with a deal looking imminent, Wells Fargo said any takeout offer would at least be above $50 a share, with the potential for bids as high as $56. When activist investor Engine Capital first started publicly pushing for a sale back in December, it estimated a price tag of between $50 and $55 based on the multiples paid in recent industry transactions.

Falling Short
Couche-Tard is paying a lower price for CST than many analysts estimated.
Source: Bloomberg, analyst reports
Estimates for Mizuho and Wells Fargo reflect the mid-point of the analysts' given ranges for potential takeout valuations. Wells Fargo and Jefferies estimates are as of last week, while Mizuho estimate is as of June.

But then, why did analysts and investors have such lofty expectations? While low fuel prices have lifted CST's profitability and incentivized consumers to spend their savings at the pump on cigarettes and snacks, those trends aren't going to last forever. It's hard to justify paying a juicy multiple relative to sales and earnings power that might very easily decrease in the coming years -- and it's even harder to justify paying up if there aren't any other bidders.

As my colleague Gillian Tan has noted, Couche-Tard is a logical buyer, but it was also probably the only one in a position to pull off a deal. Other gas-station owners such as Sunoco and Marathon Petroleum were likely turned off by CST's fuel-supply agreements with its former parent company, Valero Energy. Those contracts extend through 2028 and would have limited the synergies either company could tap into by linking CST up with their own affiliated refining operations. As such, getting top dollar was going to be a long shot. Don’t expect any counterbids; other buyers have had plenty of time to come forward in the more than five months since CST announced it was exploring a sale.

CST shareholders are still making out pretty well in this deal. The premium looks measly compared to last week's stock price, but CST shares had already run up about 40 percent in anticipation of a deal. Couche-Tard is topping the stock's highest stand-alone price since its 2013 spinoff from Valero and paying a 26 percent premium to analysts' average price target before the sale speculation picked up in the spring.

At about 11.4 times CST's projected 2016 Ebitda, the deal may actually help lift the sum-of-the-parts valuations for refiners with embedded retail segments such as Phillips 66, Marathon Petroleum and Tesoro, according to Sam Margolin of Cowen. The analyst currently assigns an 8 times multiple to the retail components of refiners.  

Either way, it's a decently excellent deal for CST shareholders.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

  1. Couche-Tard separately agreed to sell some of CST's Canadian assets to Parkland Fuel for about $750 million after the transaction closes.

To contact the author of this story:
Brooke Sutherland in New York at bsutherland7@bloomberg.net

To contact the editor responsible for this story:
Beth Williams at bewilliams@bloomberg.net