A bet on Alimentation Couche-Tard Inc. ATD-T has often rested on the company’s ability to consolidate the world’s fragmented convenience stores and generate savings and efficiencies from a growing network of outlets.
So why are investors suddenly nervous about the prospect of a really big deal?
Couche-Tard’s share price has hit a soft patch over the past two months, ever since it confirmed it was in discussions to acquire Seven & i Holdings Co., Ltd., the Japanese parent of 7-Eleven – by far the biggest target in the Laval, Que.-based company’s four-decade history of consolidation.
While the S&P/TSX Composite Index has risen about 5 per cent since mid-August, Couche-Tard’s share price has slumped more than 11 per cent.
The stock, an impressive long-term performer that has generated returns of 312 per cent over the past decade, according to S&P Global Market Intelligence, is now going through a rare lull.
It has underperformed the Canadian consumer staples sector – mostly a collection of grocers and other essential retailers – by 23 percentage points this year. It is trading close to a one-year low.
You can understand why investors are taking a cautious approach to Couche-Tard right now.
For starters, its existing convenience stores aren’t exactly brimming with growth. In its most recent quarterly results, released Sept. 4, the company reported year-over-year declining sales in all regions.
Especially noteworthy was the 1-per-cent drop in U.S. same-store sales, given the size of the U.S. market.
The decline contributed to the lowest two-year growth record in at least a decade, according to Mark Petrie, an analyst at CIBC Capital Markets, as struggling low-income consumers put more importance on value than convenience.
What’s more, Couche-Tard so far has revealed few details about its offer for Seven & i Holdings, other than confirming its interest and stating its belief that a combination would generate clear strategic and financial benefits for both companies.
Though the Canadian company has been mum so far on the value of its offer, it’s most definitely big. Reports this week suggest Couche-Tard has raised its bid to US$47-billion, which represents a 22-per-cent bump over the original, reported all-cash offer.
To put that into perspective, Couche-Tard’s market capitalization – the value of all its outstanding shares – is about $70-billion, or about US$51-billion at current exchange rates.
In other words, Seven & i Holdings would be a lot to absorb and finance.
Additional perspective: Couche-Tard’s most recent major takeover, when it closed a deal in January to acquire more than 2,000 service stations from TotalEnergies SE, was valued at €3.1-billion (US$3.3-billion). That’s pocket change compared with the current offer.
How Couche-Tard will navigate the largest deal of its long deal-making history, and clear large Japanese regulatory hurdles for a foreign acquisition, are open questions at this point. The stock’s sluggish recent performance suggests investors are waiting for answers.
For its part, Seven & i Holdings has resisted Couche-Tard’s polite overtures, adding more uncertainty.
Initially, the Japanese company said the offer was too low. On Thursday, it buttressed its case for remaining independent when it announced a dramatic overhaul of its business.
There’s a new name – 7-Eleven Corp. – and it will separate its supermarkets and specialist stores into another holding company, providing some much-needed focus.
But Couche-Tard can still prevail, and investors may want to bet on it.
Luke Hannan, an analyst at Canaccord Genuity, estimates that a successful takeover would drive cost savings of about US$2-billion, contributing to Couche-Tard’s profits on a per-share basis.
“We believe it’s unlikely the company will find a significantly better deal than the one Couche-Tard has just put forward,” Mr. Hannan said in a note Wednesday.
Seven & i Holding’s latest quarterly results, which showed profits tumbling 35 per cent from last year, might support this belief.
There’s also Couche-Tard’s track record to consider here. Through years of deal-making, it now owns a network of 16,800 stores, including those under the Circle K banner, in 31 countries and territories, using its vast scale to enhance profitability and deliver market-beating returns to shareholders.
“These guys have been extremely disciplined in the way they’ve made acquisitions and integrated the companies they bought,” said Yan Cimon, professor of strategy at Laval University’s faculty of business administration, in an interview.
Though much larger than previous acquisitions, this latest target may be no different. And for investors, that’s a good thing.