Couche-Tard bags Circle K chain in U.S.

The proposed transaction will more than triple the number of the Laval, Que.-based company's U.S. stores to more than 2,000 from about 700, and vault Couche-Tard to the No. 4 spot from No. 7 in North American convenience store rankings. Dallas-based 7-Eleven Inc. holds the top spot in the highly fragmented market, with 5,800 stores in the United States and Canada.

The Globe and Mail
October 7, 2003

Couche-Tard bags Circle K chain in U.S.
Expect more acquisitions over the next 18 months or so, CEO tells analysts
Bertrand Marotte

MONTREAL — Alimentation Couche-Tard Inc. announced a blockbuster $1.1-billion deal yesterday to buy more than 2,000 U.S. convenience stores that will more than double annual revenue to almost $9-billion.

The agreement to purchase the Circle K Corp. retail-outlet-and-gas chain from Texas oil giant ConocoPhillips Co. is by far Couche-Tard's biggest acquisition to date.

And Couche-Tard chairman, president and chief executive officer Alain Bouchard said there are more to come.

Expect more acquisitions once Couche-Tard has digested Circle K over the next 18 months or so, Mr. Bouchard told financial analysts and investors during a conference call.

"This provides a strong nationwide platform for further expansion."

Shareholders lapped up the news. Couche-Tard's class B shares jumped $3.90, or almost 23 per cent, to close at $21 on the Toronto Stock Exchange.

The proposed transaction will more than triple the number of the Laval, Que.-based company's U.S. stores to more than 2,000 from about 700, and vault Couche-Tard to the No. 4 spot from No. 7 in North American convenience store rankings.

Dallas-based 7-Eleven Inc. holds the top spot in the highly fragmented market, with 5,800 stores in the United States and Canada.

Sales, on a pro forma basis, would be $8.8-billon, up from $3.6-billion, with 54 per cent coming from merchandise and 46 per cent from gas.

Profit, also on a pro forma basis, jumps to $110-million from $70-millon.

Total employees will number about 37,600, and 75 per cent of sales will be in the United States.

The Circle K outlets — 1,663 corporate and about 350 franchised or licensed — are concentrated in the fast-growing sun belt, with 523 stores in Arizona, 360 in Florida, 158 in California and 151 in Louisiana. It has stores in 16 states in total.

Couche-Tard's existing U.S. stores — under the Mac's, Handy Andy and Dairy Mart banners — are concentrated in the Midwest.

Couche-Tard is Canada's largest convenience store operator, with 1,800 locations. The Circle K deal would boost its total number of stores in North America to 4,630 from 2,575.

The acquisition will also boost traditionally cautious Couche-Tard's debt-to-capital ratio to 64 per cent from 38 per cent, but the company's goal is to bring it back down to the 50-per-cent level within 18 months.

What's more, the deal to buy the profitable stores is a steal at only 5.4 times trailing 12-month EBITDA (earnings before interest, taxes, depreciation and amortization), said chief financial officer Richard Fortin.

Factoring in expected annual savings of at least $50-million (U.S.), the transaction comes in at four times EBITDA, and drops to 3.3 times EBITDA with plans to sell and lease back the real estate on about 40 per cent of 900 stores, Mr. Fortin said.

The average multiple in the industry these days is 5.4, he said at the news conference following the analysts' call.

The acquisition is expected to increase annual profit per share from a preacquisition 81 cents (Canadian) to $1.10 — $1.54 if yearly cost savings of $50-million are included, Mr. Fortin said.

Couche-Tard will assume $12-million of Circle K debt.

The deal is being financed with a mix of private equity and debt.

Couche-Tard has sold 13.5 million class B subordinate voting shares in a private placement valued at $223-million.

Debt financing of about $1.2-billion is to be arranged with National Bank Financial Inc., Scotia Capital Inc. and CIBC World Markets Inc.

Transaction costs are about $50-million.

"I think this is an excellent acquisition given the size of the deal and the multiple being paid," said Jason Hornett, equity analyst with Calgary-based Bissett Investment Management.

Financial analyst William Chisholm of Dundee Securities Corp. in Toronto said yesterday that he's raising his target price to $23 from $18 and thinks the stock could reach $30 with the "integration synergies" achieved over an 18-month period.

A U.S. acquisition was widely expected — Mr. Bouchard said as much at the annual meeting two weeks ago — and Circle K was clearly in Couche-Tard's sights.

The size of the deal, however, was a bit of a shock, given that company executives had stated they were looking to buy a maximum of 500 stores in a U.S. purchase.

"The number of stores was a bit of a surprise," Mr. Hornett said.

Mr. Bouchard told reporters he's comfortable with the size of the acquisition, given Couche-Tard's track record of successful takeovers.

Company officials said it's too early to say how many jobs will be cut from the combined operations, but said there is very little overlap.

The deal also includes a five-year fuel supply agreement with ConocoPhillips, the third-largest U.S. oil company.


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