With Latest Deal, Circle K Owner Steps Up Canadian Invasion

  • Couche-Tard adds 522 locations in purchase of Holiday stores
  • Company will have footprint in 48 U.S. states, Canada, Europe

A Circle K store in Chula Vista, California, on Aug. 29, 2007.

Photographer: Sandy Huffaker/Bloomberg

A Canadian company is trying to corner the corner-store market in the U.S.

Alimentation Couche-Tard Inc., which is based outside of Montreal and better known as the owner of Circle K stores, is poised to expand its footprint to 48 U.S. states with the acquisition of closely held Holiday Stationstores Inc., a deal announced Monday. The transaction, valued by analysts at $1.5 billion to $2 billion, extends a buying spree that crossed the border 16 years ago and has now gone global.

The deal by Couche-Tard, which reported quarterly profit Wednesday that beat analysts’ estimates, furthers the reach of a company that’s little known to Americans even though it has 6,000 locations in the U.S. The purchase of 522 stores, a food commissary and a fuel terminal gives Couche-Tard -- French for “Night Owl” -- access to the upper Midwest market, including a stronghold in the Minneapolis region, and boosts its expertise in selling prepared food.

It is Couche-Tard’s third major investment in the U.S. since December 2014, after the almost $4 billion acquisition of gas-station chain CST Brands Inc., which closed just weeks ago. The company is now focusing on reducing its debt levels to preserve its investment-grade credit ratings.

“There’s room for deals,” Chief Financial Officer Claude Tessier said in a phone interview, referring to the U.S. market. “For now we’re digesting, integrating the big acquisitions we’ve made.”

Tessier said there are about 154,000 corner stores in the U.S., and 30 to 50 medium-size chains that make for potential targets. Some are operating on the east coast of the U.S., where Couche-Tard doesn’t have a strong presence, he said.

Texas to Alaska

Assuming the Holiday acquisition is approved by regulators, a Canadian company that started with one store in a Montreal suburb in 1980 would have U.S. customers from Texas to Alaska, adding six states to its reach. While the acquisition would move Couche-Tard closer to U.S. market leader 7-Eleven, the industry is highly fragmented, with chains accounting for 37 percent of total stores, according to a Bloomberg Intelligence report from March.

The acquisition “reflects that the industry consolidation theme continues in the U.S. and Canadian convenience and fuel market,” Keith Howlett, an analyst at Desjardins Capital Markets, wrote in a note to investors.

Profit grew to 52 cents a share, excluding some items, in the period ended April 30, Couche-Tard said Wednesday in a statement. Analysts projected 46 cents on average. Sales in Europe and efforts to control costs helped make up for lower gasoline and products margins in the U.S.

With the acquisition, Canadian companies have made 18 deals valued at $1 billion or more to buy U.S. targets so far this year, compared with 21 for all of last year, according to data compiled by Bloomberg.

Laval, Quebec-based Couche-Tard said the agreement bars it from disclosing financial terms. It forecast that Holiday would add $180 million to $190 million a year in earnings before interest, income taxes and depreciation and amortization, which last fiscal year amounted to about $2.4 billion.

Asia Expansion

Alain Bouchard, the co-founder and now executive chairman, has gradually expanded the company, first in its home market, then to the rest of Canada, before entering the U.S. in 2001 and Europe in 2012. The company has a no-frills reputation, with top management known for visiting scores of stores before making acquisitions to spot the weaknesses.

“We’re looking really heavily right now into developing our business in Asia,” Tessier said, adding that the Mexican market is also opening up.

In Holiday, Couche-Tard said it identified a “very well-run company” with similar growth prospects and a strong local brand. Strong points include a successful car-wash subscription program, a food commissary that makes thousands of sandwiches a day, and data analytics used for pricing, Chief Executive Officer Brian Hannash told analysts after the announcement.

‘Excellent Fit’

Mark Petrie, an analyst with CIBC World Markets, called it an “excellent fit” thanks to limited geographic overlap between the two companies and Holiday’s market share of about 30 percent in its territory.

Couche-Tard shares rose 3.7 percent to C$62.40 at the close Wednesday. They have climbed 2.5 percent this year, compared with a 3.4 percent gain for a sub-index of Canadian consumer-staple sellers.

That underperformance has been unusual for Couche-Tard, “a favorite of investors for the last 15 years,” GMP Securities analyst Martin Landry wrote. He called the price “an appealing entry point into one of the best-managed companies in Canada.”

— With assistance by Aoyon Ashraf, and Allison McNeely

    Before it's here, it's on the Bloomberg Terminal.
    LEARN MORE