Alimentation Couche-Tard announced it was pulling its bid for a US$46-billion takeover of 7-Eleven owner Seven & i.Christinne Muschi/The Canadian Press
Alimentation Couche-Tard Inc. ATD-T will now prowl for other targets after ending its nearly year-long pursuit of Japanese rival Seven & i Holdings Co., as the Canadian convenience-store giant tries to revive its main U.S. business in a shaky economy.
Laval, Que,-based Couche-Tard had hoped to pull off what would have been the biggest foreign takeover of a Japanese corporation. Instead, it ran out of patience with what it said late Wednesday was an unco-operative counterpart. In a scathing letter to Seven & i’s board, Couche-Tard called out its rival’s directors for waging a “calculated campaign of obfuscation and delay” and questioned the company’s governance.
Shares in Couche-Tard jumped 8 per cent higher Thursday, just hours after the Circle K chain owner announced it was pulling the plug on its US$46-billion takeover effort of Seven & i, owner of the 7-Eleven chain. Shareholders had been worried about the sizable debt Couche-Tard would need to fund a purchase as well as possible ownership dilution.
“The main thing that we stressed was not to chase” a deal of this size at any cost, said Mark Rutherford, portfolio manager at Mawer Investment Management in Calgary, which holds a roughly 1.75-per-cent stake in Couche-Tard worth more than $1.2-billion.
“There are lots of other opportunities they likely have,” he said in an interview.
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The denouement was not unexpected. Pressure on Seven & i to negotiate an agreement had diminished in recent weeks after its directors were elected with resounding majorities at the annual meeting in May, a sign that investors backed the board’s own plan to reverse years of underperformance.
It’s not impossible that Couche-Tard could approach Seven & i again, but the company would need proof that the Japanese counterpart is willing to open its doors in a real way and it does not see that happening at the moment, according to a person familiar with the matter. The Globe and Mail is not naming the source as they are not authorized to speak publicly.
Couche-Tard executives sought repeatedly to speak with Seven & i’s founding Ito family but were rebuffed, according to the Canadian company’s account of the events. Meanwhile, Seven & i’s participation in two management meetings with Couche-Tard was inadequate, and after 10 weeks of due diligence, “none” of Couche-Tard’s critical questions were answered, the Canadian company said.
And while it insisted on finding a buyer for some 2,000 U.S. stores to satisfy antitrust concerns ahead of a potential agreement, Seven & i was not willing to share required information with potential buyers, Couche-Tard said. It said it needs “deeper and genuine” engagement from Seven & i if ever it were to revisit a bid.
“They wasted a year and a half on this, and I think big shareholders got frustrated,” said Paul Harris, portfolio manager at Harris Douglas Asset Management, which holds Couche-Tard shares among $175-million in assets under management.
“If [Seven & i] wants to do this deal, then let them come to you,” he said in an interview.
Investors are now turning their attention to life after Seven & i for Couche-Tard, which will include share buybacks and other, albeit likely smaller, acquisitions. The company had roughly US$2.3-billion of cash on its balance sheet at the end of April.
One major opportunity might be making a play for Britain-based convenience and gas station operator EG Group. Brothers Mohsin and Zuber Issa, founders of the chain, are laying the groundwork for an initial public offering of the company in the United States at a possible valuation of US$14-billion, according to reports in Mergermarket and The Telegraph.
The United States generally remains ripe for takeovers. The market there is highly fragmented, with the top 10 convenience chains making up only 19 per cent of the total number of corner-store outlets. The balance consists mostly of independent mom-and-pop shops.
“We suspect that potential deals [for Couche-Tard] have been on hold for months,” Scotiabank analyst John Zamparo said in a research note.
He estimates that it takes a takeover of about 200 stores to generate a 1-per-cent gain in earnings per share, before cost-saving benefits. There are roughly 40 businesses of that scale in the United States, he said.
“It’s true that Couche-Tard is very large and needs large acquisitions to move the needle,” Stifel analyst Martin Landry said in an interview.
“But they have had success consolidating the space with small and medium acquisitions, and that’s where they are able to extract a lot of synergies. And I don’t think that changes. Their recipe is very clear.”
Couche-Tard last month won clearance from U.S. regulators to proceed with its purchase of GetGo Café and Market from Giant Eagle, adding 270 stores and 3,500 employees across five states to its ranks.
Mr. Rutherford sees Couche-Tard growing its stable of car washes to complement its gasoline stations and building out its European presence further after taking over retail assets from TotalEnergies last year.
Organic growth is also not to be overlooked, Mr. Landry said, echoing comments from other analysts that with thousands of locations, “if you can grow these sales and develop initiatives to drive organic growth, that’s going to be meaningful.”
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Contrary to popular belief that Couche-Tard’s performance has been largely driven by acquisitions, an analysis published by National Bank analyst Vishal Shreedhar found that the company’s growth in earnings before interest, taxes, depreciation and amortization over the last 10 years has been supported by both acquisitions and organic growth in relatively equal proportions.
The challenge for Couche-Tard in the near term is to reinvigorate its U.S. business, which has come under pressure as consumers watch their pennies more closely, Mr. Landry said.
The company has been successful with some initiatives but will need to establish a stronger food offering to stimulate traffic and get back to positive merchandise same-store-sales growth, which has been negative for six consecutive quarters, he said.
Couche-Tard, founded by chair Alain Bouchard and three friends in 1980, has ballooned in size from a regional convenience-store chain to a global titan through acquisitions and organic growth. It now has about 17,000 stores in 29 countries and territories and employed 146,000 workers at last count.