October 07, 2003Couche-Tard Inc. has bought the Circle K chain
Tuesday, October 07, 2003 MONTREAL - Alimentation Couche-Tard Inc. has bought the Circle K chain from oil giant ConocoPhilips Inc. in a deal that will make the Quebec company one of the largest retailers headquartered in Canada and position it to rival 7-Eleven as the continent's largest convenience store operator. Couche-Tard will pay US$830-million ($1.12-billion) to buy just over 2,000 Circle K stores in a belt of 16 U.S. states that runs down the west coast and crosses the country's sunbelt to the Atlantic. The largest concentration of stores are in Arizona (523 stores), Florida (366), California (158) and Louisiana (151). The company already has 700 stores in the U.S. Midwest after a string of acquisitions since mid-2001. "It's a massive acquisition," said CIBC World Markets analyst Michael Van Aelst. "But the company has made large acquisitions before and consolidated them with great success. There's no reason to believe they can't do it now." Investors bid up Couche-Tard's subordinated voting stock by 22%, or $3.90, to an all-time high close of $21 after management said it could produce at least US$50-million in annual cost savings and immediately increase margins and earnings per share. Meanwhile, chairman and chief executive Alain Bouchard signalled the deal has done little to quell his appetite for expansion in the U.S. "We're already the leading consolidator in a fragmented industry and ... tremendous opportunities for growth remain," he said. "We've got a clear vision of the future ... and we'll be a buyer again" -- likely after the company finishes integrating this purchase within two years. The purchase had been widely expected, only its size surprised some analysts, who had expected Couche-Tard might buy a few hundred of the Circle K stores. The deal, due to close in December, will give Couche-Tard a total of 4,630 stores, about 2,700 of them in the U.S., and make the company the fourth-largest convenience store operator in North America, about 1,200 stores behind 7-Eleven Inc. (The industry leader has an additional 18,000 international stores). The deal will more than double Couche-Tard's annual revenue to about $8.8-billion, leapfrogging stalwart Canadian retailers Hudson's Bay Co. (parent of The Bay and Zellers), Shoppers Drug Mart Corp. and Canadian Tire Corp. Ltd. in size. Only Wal-Mart's Canadian operation and the Loblaw and Sobey's grocery chains are bigger. "Given the other deals they've done I don't think this is that much of a piece," said Jason Hornett, an analyst with Bissett Investment Management in Calgary. "They are excellent store operators and they've proven in the past they can go into the U.S., make the acquisitions and make them succeed." It's the second time Couche-Tard has more than doubled its size with an acquisition that transformed the company. In 1999, the company bought Mac's and Beckers owner Silcorp Ltd. for $220-million, tripling its size and establishing Couche-Tard as a cross-Canada player and the domestic industry leader. The latest deal will result in Couche-Tard deriving three-quarters of its revenue from the United States, up from just 40% before the deal, and zero in early 2001. After a string of would-be consolidators failed in the past three years, Couche-Tard remains one of the only North American-based buyers of stores in a market flooded with sellers. Industry watchers believe gasoline giants -- which dominate the list of top convenience-store owners -- are looking to sell about one-third of their stores as they continue to focus on their core business, as ConocoPhillips has done. "It's like they're above looking down, and they're cherry-picking what they want," Mr. Van Aelst said. Couche-Tard is paying 5.4 times Circle K's operating earnings, a multiple that falls to four times after factoring in the expected cost savings. "It's dirt cheap," said Mr. Van Aelst. Meanwhile, Couche-Tard has been acting as if it's operating in an entirely different industry than its competitors. While the industry is known for standardized, "cookie cutter" stores that are managed centrally, the Montreal company takes a decentralized approach, customizing store designs and merchandise offerings to local tastes, and leaving regional management teams to run complements of no more than 700 stores. The company has derived huge sales increases by adding fresh food and restaurant counters and renovating dozens of stores each quarter. Earnings have grown by an average 79% annually over the past 11 years, running counter to its peers, which have suffered from declining gas and cigarette margins. Couche-Tard executives said Circle K was one of the best-managed and located chains in the industry, with lots of stores in high-population growth areas in the South.They determined the company's brand is so strong they will keep the banner, rather than changing it to Mac's, as they have done elsewhere in the United States. Jeff Lenard, a spokesman with the National Association of Convenience Stores in the United States, said the two companies will complement each other well, as Circle K management have dabbled in innovations such as adding lottery and video e-mail kiosks to stores. "The combination will make for a robust set of stores," he said. But they will likely substantially trim the headcount at Circle K's head office and split Circle K into four divisions, each with its own growth strategy. Analysts said Texas and California likely represent the best growth opportunities for the company. In addition, only one-third of Circle K stores have bar-code scanners, something the new owners will change. Couche-Tard will pay for the deal with a new $1.2-billion credit facility and a private placement of 13.5-million subordinated voting class B shares for proceeds of $223-million. The company plans to immediately cut debt by $300-million by selling 300 of its stores and leasing them back. TOP VARIETIES: Number of convenience stores*: 1 7-11 Inc. 5,829 2 Royal Dutch./ Shell Group of Companies 5,372 3 BP PLC 4,900 4 Alimentation Couche-Tard Inc.** 4,630 5 Exxon Mobil Corp.** 2,799 *Based on data collected in 2002 **Ranking after deal closes. Source: Convenience Store News [email protected]; [email protected] |