Couche-Tard Agrees to Buy CST Brands for Almost $4 Billion

  • Acquisition expands foothold in Texas and eastern Canada
  • Price represents premium of 42% since buyout speculation began

Alimentation Couche-Tard Inc. agreed to buy the gas-station chain CST Brands Inc. for almost $4 billion, using its biggest-ever acquisition to expand in Texas and eastern Canada.

Couche-Tard will pay $48.53 a share in cash for CST, according to a statement Monday that pegged the equity value of the deal at $3.78 billion. Including debt, the offer is valued at about $4.4 billion.

The deal brings Couche-Tard -- French for “night owl” -- thousands of locations in the southeastern U.S., Texas and New York, as well as eastern Canada, part of a push to use mergers to expand. This is the convenience-store chain’s fourth acquisition announcement this year and the largest in its 36-year history. It eclipses the 2012 purchase of Statoil Fuel & Retail ASA for about $2.8 billion, which established a foothold in Europe.

“It’s a great fit geographically,” Brian Hannasch, chief executive officer of Laval, Quebec-based Couche-Tard, said on a conference call with reporters. “Our strength is in the U.S. Southeast, the West Coast and the Midwest. Texas is one of the fastest growth markets in the U.S.”

New Loan

To finance the deal, Couche-Tard will draw on available cash and a new term loan, as well as existing credit lines. It expects to complete the transaction early next year. Couche-Tard also announced a separate deal to sell some of CST’s Canadian assets to Parkland Fuel Corp. for about $750 million after the initial transaction closes. The number of stores included in that deal will depend on the outcome of a review by Canada’s Competition Bureau.

“In terms of the footprint, there shouldn’t be competitive issues, as most of the Canadian assets are being sold to Parkland,” said Steve Belisle, a fund manager with Manulife Asset Management. His team manages about C$3 billion ($2.3 billion), including shares of Couche-Tard and Parkland Fuel.

“The integration shouldn’t be complicated,” Belisle said. “They’ve done a good job in the past on that.”

Couche-Tard jumped 6.9 percent to C$66.43 at 1:09 p.m. in Toronto, after reaching an all-time intraday high of C$67.99, while CST was little changed at $47.50. Parkland climbed 15 percent to C$29.16, after touching a record high of C$29.27.

Debt Ratio

The deal will generate pretax cost savings of $150 million to $200 million within two to three years of its completion, Couche-Tard said in a presentation on its website. The purchase is expected to boost earnings within the first year and increase profit by 40 cents to 50 cents a share annually within the third year.

Adjusted net debt to earnings before interest, taxes, depreciation, amortization and rent will rise to 3.5 times after closing of the CST deal, Couche-Tard said. The ratio was predicted to drop to 3.1 times after the first year following the close, and to 1.4 times after the fifth year. Couche-Tard forecast pro forma annual revenue of $47.7 billion and adjusted Ebitda of $2.9 billion on completion of the deal.

The deal price represents a 42 percent premium over CST’s closing price on March 3, before that company sparked takeover speculation by saying it would explore strategic alternatives.

Couche-Tard, Canada’s biggest convenience-store company, operates more than 12,000 locations globally under brands such as Circle K and Mac’s. CST has about 2,000 stores in the U.S. and Canada, most of which are in Texas, Quebec and Atlantic Canada. Its brands include Corner Store and Dépanneur du Coin.

Couche-Tard will continue to look at smaller-scale acquisitions in the next few months, though the company plans to be “more selective,” Hannasch said on a conference call with analysts. The pipeline for so-called “tuck-in” deals is “robust,” he added.

Overseas Deals

Couche-Tard in February completed the purchase of Topaz Energy Group Ltd., Ireland’s biggest convenience and fuel retailer with 444 stations. Three months later, the Canadian company bought A/S Dansk Shell’s downstream retail business in Denmark. Last year, Couche-Tard acquired the Pantry Inc. chain for about $1.7 billion, including debt, adding more than 1,500 U.S. stores.

CST’s network “is in good shape” and will likely require less investment than Pantry did, Hannasch said. He didn’t provide specific figures.

As part of the transaction, Couche-Tard also will inherit CST’s 19 percent holding in CrossAmerica Partners LP, a fuel distributor with operations in 29 U.S. states. The stake is valued at about $150 million, Couche-Tard said.

Morgan Stanley and National Bank Financial Group advised Couche-Tard on the CST acquisition, while Faegre Baker Daniels and Davies Ward Phillips & Vineberg served as legal advisers. CST was advised by Bank of America Corp. and JP Morgan Chase & Co. and by law firms Wachtell, Lipton, Rosen & Katz and Stikeman Elliott.

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