Couche-Tard buys U.S. Circle K chain

Shares of Alimentation Couche-Tard Inc. soared today after Canada's biggest convenience-store operator boosted its U.S. presence dramatically with a $1.1-billion purchase that gives the Montreal-based company about 2,000 more stores. Couche-Tard, whose Canadian banners include Mac's, Becker's and Provi-Soir, said the takeover of Circle K Corp. makes it the fourth-largest convenience store operator in North America with a total of 4,630 stores.

The Toronto Star
October 6, 2003

Couche-Tard buys U.S. Circle K chain
Donald McKenzie

MONTREAL (CP) - Shares of Alimentation Couche-Tard Inc. soared today after Canada's biggest convenience-store operator boosted its U.S. presence dramatically with a $1.1-billion purchase that gives the Montreal-based company about 2,000 more stores.

Couche-Tard, whose Canadian banners include Mac's, Becker's and Provi-Soir, said the takeover of Circle K Corp. makes it the fourth-largest convenience store operator in North America with a total of 4,630 stores.

The news propelled Couche-Tard's shares higher by nearly 23 per cent to an all-time high. The company's B stock gained $3.90 to close at $21, a gain of 22.81 per cent, on the Toronto Stock Exchange.

Couche-Tard chairman Alain Bouchard was pleased with the acquisition of a company that had sales of $5.2 billion Cdn last year.

"We've been in a position to negotiate an attractive price for a profitable and well managed company," Bouchard said in a conference call.

"We visited all the divisions and the operators are strong. We strongly believe that with the management team in place, we can make it a very, very successful acquisition."

The acquisition is one of several recent moves by Canadian companies to expand in the United States and internationally.

Last week, cheesemaker Saputo Inc. struck a $68-million deal to buy Molinos Rio de la Plata, the third-largest dairy company in Argentina, to serve as a springboard for global exports.

Only days earlier, Toronto-based Manulife Financial announced the acquisition of John Hancock Financial Services of Boston in a stock swap valued at $13.5 billion. That would make the merged company the second-biggest life insurer in North America.

Meanwhile, Montreal-based Alcan received final regulatory approvals to acquire France's Pechiney and create the world's biggest aluminum producer in terms of sales - if shareholders accept.

Circle K, owned by oil company ConocoPhillips, has 1,663 corporate stores and 350 franchise outlets in 16 states, mostly in Arizona, Florida and other southern states.

The third largest U.S. oil producer, ConocoPhillips said Monday the Circle K sale will cut the streamlining energy company's workforce by nearly a third - about 17,400 employees - to a worldwide total of 38,400. Alimentation said it expects to keep the ``vast majority" of those displaced employees.

Jason Hornett, an equity analyst with Bissett Investment Management, said the deal was a great coup for Couche-Tard, which had sales of $3.6 billion last year.

"I think it's an excellent acquisition for them, given the price they paid for it - roughly about four times EBITDA (earnings before interest, taxes, depreciation and amortization) when you include the synergies," Hornett said from Calgary.

And Hornett said he believes Couche-Tard's share value will continue to improve with the purchase.

"Given the fact this acquisition - if you factor in the synergies they're estimating on a pro-forma basis - essentially doubles its earnings, I think the share price will continue to be strong.

"The marketplace had been anticipating some kind of acquisition, although I don't think anyone was really expecting the number of stores they did purchase. The size of the deal is a bit of a surprise."

Bouchard said Couche-Tard will take time to digest Circle K before looking at other targets in the United States.

"It significantly strengthens our U.S. growth platform." he said. "That means there is room for growth. Not for the time being. We will take the time to integrate this acquisition, but later on."

In September, Couche-Tard attributed more than 80 per cent of its quarterly sales growth to the acquisition of 404 Dairy Mart convenience stores in the Midwest.

And during the summer, Couche-Tard bought 43 stores from Clark Retail Enterprises for $24.5 million, bringing its total number of stores in the U.S. Midwest to 674.

Monday's transaction, which Couche-Tard (TSX: ATD.B) said will immediately add to earnings, requires regulatory approval but is expected to close in December.

Subject to final adjustments, the price of Circle K is $830 million (U.S.), including $9.1 million in assumed debt.

About half of Circle K's sales come at gas pumps, and Bouchard said the company's geographical diversity should protect Couche-Tard from fluctuating fuel prices.

"That means when gas margins are lower in the Midwest, it can be better in Arizona, or Florida, or California."

Circle K sells fuel at about 86 per cent of its locations. As part of the sale agreement, ConocoPhillips also will supply Couche-Tard with 1.2 billion gallons of gasoline a year for the next two to five years at market prices.

Houston-based ConocoPhillips, created last year from the merger of Phillips Petroleum and Conoco Inc., has sold $2.7 billion (U.S.) in assets so far this year with a goal of selling $3 billion to $4 billion by 2004. The Circle K sale would push that total to more than $3.5 billion.

Shedding of retail and other marketing sites, including service stations, is part of the company's post-merger consolidation plan.

Jim Nokes, ConocoPhillips' executive vice-president of refining and marketing, said the Circle K sale is a "significant step" toward the company's consolidation efforts.


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