Couche-Tard snubbed loyal investors

But to some of the investors who were left out, the whole thing smells. At $16.50 a share, the inside shareholders were paying about 11 times what the enlarged Couche-Tard might be expected to earn once the cost cutting at Circle K is complete. The stock normally trades at closer to 20 times the company's profit. True, the deal adds an element of risk — Couche-Tard's debt will rise from less than $300-million to $1.2-billion — but is it enough to warrant such a massive discount? Hardly. "It may have been legal. It's not right," says one institutional investor who is angry enough to have sworn off any future investment in Couche-Tard. "There were alternatives."

The Globe and Mail
October 15, 2003

Couche-Tard snubbed loyal investors
Derek DeCloet

Frank Quattrone, the man who turned Credit Suisse First Boston into a leading underwriter of the dot-com era, took the stand in his own defence last week. Officially, the former investment banker faces charges of obstruction of justice and witness tampering; unofficially, the case is about what happens behind closed doors on Wall Street. On Friday, prosecutors got Mr. Quattrone to admit that, yes, he had a role in deciding who got shares in hot initial public offerings, and tried to use it to curry favour with friends and clients.

Elsewhere in New York, a former hedge fund employee last week pleaded guilty to illegal late trading in mutual funds — a felony. Late trading allowed sophisticated investors to make short-term profits from after-hours news, at the expense of the rubes who invested for the long term. Eliot Spitzer, the state Attorney-General, has predicted that a "significant number of criminal cases" will result from his investigation.

The undercurrent in both of these episodes is fairness. Once-acquiescent U.S. regulators will put up with Wall Street's double standard no more: Investors must be treated equally (or as equally as possible). But in Canada, progress is slower, judging by last week's deal by Alimentation Couche-Tard.

Couche-Tard is buying Circle K, a convenience store chain with 1,663 outlets in the United States, for $1.1-billion. It's a huge deal and, at first glance, a smart move for the Quebec company. Once it's finished ripping out $67-million in costs, the deal should increase share profit by about 90 per cent, according to management's figures. No wonder investors seem to like it. When the details were made public, Couche-Tard shares shot up to $21 from about $17. And that's where the controversy begins.

Couche-Tard borrowed most of the money it needed to pay for Circle K. It also raised $223.6-million in new equity from a small group of investors — rumour has it only eight buyers were involved. The investors signed confidentiality agreements and were given a preview of some details of the acquisition. Then they filled their boots with new stock (in the form of subscription receipts) at $16.50 a share.

The fortunate few are now sitting on substantial paper profits for buying on inside information. Quebec food retailer Metro Inc., which bought about 10 per cent of the financing, is already $6-million in the black, documents show.

All of this is perfectly legal under existing private placement rules and, insiders to the deal say, was necessary to complete the Circle K acquisition. Couche-Tard had to have the money lined up in advance, and its bankers were only willing to lend so much. It needed equity and had no choice but to raise it privately. "We wanted to have equity before the announcement of the acquisition, not to be at the mercy of the market. It's a question of risk, really," said chief financial officer Richard Fortin.

But to some of the investors who were left out, the whole thing smells. At $16.50 a share, the inside shareholders were paying about 11 times what the enlarged Couche-Tard might be expected to earn once the cost cutting at Circle K is complete. The stock normally trades at closer to 20 times the company's profit. True, the deal adds an element of risk — Couche-Tard's debt will rise from less than $300-million to $1.2-billion — but is it enough to warrant such a massive discount? Hardly.

"It may have been legal. It's not right," says one institutional investor who is angry enough to have sworn off any future investment in Couche-Tard. "There were alternatives." The company should have asked its bankers to commit to buy $223-million in new stock, with the price to be decided later, the investor says, which would have resulted in less dilution (and, presumably, a wider distribution of the new stock as the bankers flipped it to investors).

Still, it's not a total fiasco. The bankers got what they wanted — a deal with less risk. The company got the money it wanted. The only losers here were the majority of long-term Couche-Tard shareholders, who got left on the sidelines of a very sweet deal.

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