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Casey's Management Rejects Takeover
Casey's General Stores (Nasdaq:CASY) terminated takeover talks with 7-Eleven on November 3 saying the $43 offer wasn't good enough. This comes two months after passing on Alimentation Couche-Tard's (TSX:C.ATD.B) $38.50 offer. It appears management doesn't want to give up the keys to power despite owning less than 1% of the outstanding shares. This doesn't surprise me one bit. Robert Myers and the rest of the C-Suite seem determined to keep their jobs despite legitimate offers from two bigger competitors. In the process of fending off these takeovers, management has severely hurt the company's balance sheet, not to mention its ability to grow. Shareholders should show them the door before they can do any additional harm.
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Intrinsic Value
Since the first bid by Couche-Tard appeared in April, Casey's management has argued that $36, $38.50, $40 and now $43 are too low. So confident is management about its "true value," it bought back $500 million of its shares in August in a dutch auction. Approximately 25% of those outstanding were repurchased at $38 each, reducing the number to 37.8 million. Clearly, the company was establishing a floor price for the stock, requiring a significant premium above $38 before the board would relent. But how much of a premium? Morningstar gives Casey's a fair value of $45, which is 18% above this arbitrary floor. Others, like Vector Vest, suggest the value is closer to $60. The truth is nobody knows its intrinsic value. Sure, investors can point to hedge fund manager Steven Cohen's large position - SAC Advisors owns 6.2% of Casey's stock, down from 7.6% - as evidence that the stock is worth more than the previous offers, but that's pure speculation.
A Weaker Balance Sheet
Let's look at three financial ratios for the balance sheet. The first, current ratio, is current assets divided by current liabilities. Before the repurchase, it had $200 million in cash. That won't have changed much after the repurchase as it borrowed $569 million in senior unsecured notes at 5.22% to pay for the shares. Therefore, it was and still is around 1.1. The second ratio is cash-to-debt and that's changed substantially. Before the repurchase it was 1.2, after it was 70% lower at 0.36. The company went from having a lot more cash than debt to a lot less. Lastly, is the debt-to-equity ratio also got significantly worse.
On July 28 when Casey's management announced its $500 million recapitalization plan, they suggested the plan would generate significant value for shareholders; it would be highly accretive to its diluted earnings per share, would allow shareholders to continue to benefit from the upside and was financially prudent given its strong balance sheet. That's pure poppycock. First, investors have no guarantee the move will generate any shareholder value. Secondly, why else do you repurchase stock if not to increase earnings per share? Thirdly, just as the first point, investors have no guarantee and lastly, the balance sheet was strong but no longer.
Casey's General Stores and Peers
Potential Growth
According to analysts, Casey's sales growth in 2011 will be 12%, and 8% in 2012. As for earnings, analysts estimate they'll grow 11% per annum over the next five years. Those are both healthy numbers for sure but they'll come at a heavy price. On October 28, it announced it was acquiring 44 Kabredlo's locations for $45.8 million or 0.9 time's sales. That's almost three times Casey's P/S ratio. Supporters of an independent Casey's will point to this as proof-positive its stock is grossly undervalued. But is it? Couche-Tard's is even less. Remaining independent simply drives up the price it will have to pay for future acquisitions as they'll be competing with two larger competitors for deals instead of just one. Therefore, the growth numbers analysts have on the table at this point, especially revenues, are no sure thing and this puts a wrench in any discounted cash flow models.
Bottom Line
Casey's management believes they're creating value for shareholders. I believe they're doing the exact opposite. The enterprise value of the company August 30 prior to the dutch auction was $1.91 billion. After the share repurchase, it was $1.77 billion. Its net debt increased while its enterprise value dropped by 7%. These are not the fundamentals that indicate long-term growth. (A merger and acquisition advisor is often the best choice when selling companies. Check out Owners Can Be Deal Killers In M&A.)
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IN PICTURES: 5 Ways To Control Emotional Spending
Intrinsic Value
Since the first bid by Couche-Tard appeared in April, Casey's management has argued that $36, $38.50, $40 and now $43 are too low. So confident is management about its "true value," it bought back $500 million of its shares in August in a dutch auction. Approximately 25% of those outstanding were repurchased at $38 each, reducing the number to 37.8 million. Clearly, the company was establishing a floor price for the stock, requiring a significant premium above $38 before the board would relent. But how much of a premium? Morningstar gives Casey's a fair value of $45, which is 18% above this arbitrary floor. Others, like Vector Vest, suggest the value is closer to $60. The truth is nobody knows its intrinsic value. Sure, investors can point to hedge fund manager Steven Cohen's large position - SAC Advisors owns 6.2% of Casey's stock, down from 7.6% - as evidence that the stock is worth more than the previous offers, but that's pure speculation.
A Weaker Balance Sheet
Let's look at three financial ratios for the balance sheet. The first, current ratio, is current assets divided by current liabilities. Before the repurchase, it had $200 million in cash. That won't have changed much after the repurchase as it borrowed $569 million in senior unsecured notes at 5.22% to pay for the shares. Therefore, it was and still is around 1.1. The second ratio is cash-to-debt and that's changed substantially. Before the repurchase it was 1.2, after it was 70% lower at 0.36. The company went from having a lot more cash than debt to a lot less. Lastly, is the debt-to-equity ratio also got significantly worse.
Casey's General Stores and Peers
|
Company |
Current Ratio |
P/S |
Cash/Debt |
|
Casey\'s General Stores |
1.12 |
0.34 |
0.36 |
|
Alimentation Couche-Tard |
1.22 |
0.26 |
0.40 |
|
Pantry (Nasdaq:PTRY) |
1.63 |
0.07 |
0.18 |
|
Susser Holdings (Nasdaq:SUSS) |
1.15 |
0.06 |
0.10 |
|
Ruddick (NYSE:RDK) |
1.30 |
0.41 |
0.09 |
According to analysts, Casey's sales growth in 2011 will be 12%, and 8% in 2012. As for earnings, analysts estimate they'll grow 11% per annum over the next five years. Those are both healthy numbers for sure but they'll come at a heavy price. On October 28, it announced it was acquiring 44 Kabredlo's locations for $45.8 million or 0.9 time's sales. That's almost three times Casey's P/S ratio. Supporters of an independent Casey's will point to this as proof-positive its stock is grossly undervalued. But is it? Couche-Tard's is even less. Remaining independent simply drives up the price it will have to pay for future acquisitions as they'll be competing with two larger competitors for deals instead of just one. Therefore, the growth numbers analysts have on the table at this point, especially revenues, are no sure thing and this puts a wrench in any discounted cash flow models.
Bottom Line
Casey's management believes they're creating value for shareholders. I believe they're doing the exact opposite. The enterprise value of the company August 30 prior to the dutch auction was $1.91 billion. After the share repurchase, it was $1.77 billion. Its net debt increased while its enterprise value dropped by 7%. These are not the fundamentals that indicate long-term growth. (A merger and acquisition advisor is often the best choice when selling companies. Check out Owners Can Be Deal Killers In M&A.)
Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!
by
Will Ashworth
Will Ashworth lives and works in Toronto, Canada. He's worked in and around the financial services industry for much of his adult life. He loves investing and is passionate about helping others learn how to put their money to work.
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