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Canadian convenience store giant Alimentation Couche-Tard Inc. is making a play to buy French grocer Carrefour SA at a hefty premium in what would be a significant shift in strategy for the Circle K brand owner.
Couche-Tard recently submitted a non-binding offer letter to Carrefour for a friendly combination at a price of 20 euros per Carrefour share, the Laval, Que.-based company said in a statement Wednesday. That price marks a premium of about 29 per cent to Carrefour’s closing stock price Tuesday.
Terms of the transaction, which would be Couche-Tard’s largest-ever deal, are under discussion and remain subject to diligence but payment is currently expected to be largely in cash, Couche-Tard said. The additional information follows confirmation by the both companies late Tuesday that they were in early-stage talks.
“This would be a fixer-upper acquisition” for Couche-Tard, said Brian Madden, senior vice-president and portfolio manager with Toronto-based Goodreid Investment Counsel, which holds Couche-Tard shares among $350-million in assets under management. “Carrefour has been struggling for twenty years, and has never eclipsed its stock price high from the turn of the century. If Couche-Tard were to acquire the convenience stores on favourable terms though, I think the market would welcome the transaction.”
Taking over supermarket operator Carrefour would be a major bite for Couche-Tard to swallow. Carrefour shares have climbed 10 per cent in trading on the Paris Stock Exchange this year, pushing up the company’s market capitalization to 12.6 billion euros (about US$15.4-billion). Its enterprise value, which includes debt, is about 27 billion euros (US$33-billion). Couche-Tard, one of Canada’s biggest companies by revenue, has a market value of $46-billion (US$36-billion).
It would also be a sharp turn in strategy for the Laval, Que.-based company and its chairman, Alain Bouchard. Couche-Tard has ballooned from a regional convenience store chain to a global titan through savvy acquisitions and organic growth. But it has focused almost exclusively on convenience stores and gas stations. Adding a grocery operator of this size would take it into largely uncharted territory, even if both businesses sell food.
Couche-Tard shares fell 8 per cent to $38 in early trading Wednesday on the Toronto Stock Exchange, suggesting investors are struggling to see the merits of the acquisition. The company declined a request to make someone available to discuss its thinking.
“We question why Couche-Tard would desire to acquire a company which is predominantly a grocery operator with inherently lower margins and modest growth rates,” BMO Capital Markets analyst Peter Sklar said in a research note, adding Carrefour had a 4.8 per cent profit margin in 2019 versus Couche-Tard’s 8.3 per cent for roughly the same period. “Couche-Tard does not need to undertake such a transformational acquisition of this magnitude.”
Buying Carrefour is “theoretically” within reach for Couche-Tard, although it would stretch the company’s leverage to near the threshold for an investment-grade credit rating unless it raised money by issuing equity, Mr. Sklar said. The company has access to about $29.6-billion in debt to fund a transaction, Desjardins Capital Markets estimated.
Couche-Tard hasn’t made a major acquisition since buying Texas-based CST Brands for US$4.4-billion in 2017. But that hasn’t stopped it from looking.
Japan’s Seven & i Holdings Co., the world’s biggest convenience-store operator, agreed last fall to buy Marathon Petroleum Corp.’s Speedway chain for US$21-billion. Couche-Tard was also in the running for Speedway, a source with knowledge of the matter told The Globe and Mail, but apparently balked at the price, which values Speedway at 13.7 times earnings before taxes, depreciation and amortization.
Couche-Tard also made a non-binding, US$5.8-billion play for fuel retailer Caltex Australia Ltd., now known as Ampol, last year, but suspended the effort after the COVID-19 pandemic made Ampol’s prospects and cash flow uncertain. That situation hasn’t improved, and Couche-Tard now appears to have moved on.
More recently, Couche-Tard did a small but strategic acquisition in Hong Kong that it is betting will jump-start its future expansion in the region. The company in November agreed to buy Convenience Retail Asia Ltd. for roughly US$360-million.
While visibility “became cloudy” on the merits of a Ampol transaction, other deals will almost certainly present themselves, Couche-Tard chief executive officer Brian Hannasch told The Globe and Mail in May. Takeover multiples, which show what an investor is willing to pay per dollar of earnings, are just one element of a convenience store sector poised for transformation in the months ahead, he said at the time.
There are recent precedents for convenience store operators pushing into the supermarket sector. In the United Kingdom, TDR Capital partnered with EG Group in October to buy a majority stake in Asda from Walmart Inc.
Carrefour Group operates 12,300 stores of various sizes in more than 30 countries but is concentrated in Europe, where it runs 2,800 supermarkets and about 700 larger-scale hypermarkets. It also owns a network of smaller convenience stores with sales areas of 200 to 900 square metres under Proxi and other names. The company expects to open 3,000 convenience stores by 2022, according to its website.
Carrefour booked sales of 80.7 billion euros in 2019. It employs about 320,000 people.
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