Almost two years to the day, Canadian convenience store chain Alimentation Couche-Tard (OTC:ANCUF) announced it was offering to buy American rival Casey's General Stores (Nasdaq:CASY) for $1.9 billion. Couche-Tard ultimately backed out after Casey's borrowed heavily to buyback $500 million or 25% of its stock. Two years later it's buying the retail arm of Statoil ASA (NYSE:STO) for $3.6 billion inclusive of debt. Unlike the Casey's deal, I think this really is a game changer. For those of you unfamiliar with this little gem north of the border, now's the time to get acquainted.
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Why It's a Game Changer
The Casey's deal was hostile from the get-go; this is a friendly acquisition. Statoil's already agreed to tender its 54% interest in the gas retailer. The Financial Times believes paying a 53% premium for an asset that provides absolutely no synergy is a bad deal. Obviously the Times is unaware that Couche-Tard is a heavily decentralized operation with a very small head office. Keeping the existing management in place, Scandinavia becomes a profitable beachhead into the rest of Europe. Statoil Fuel and Retail is the number one convenience and fuel retailer in Norway, Sweden, Denmark, Latvia and Estonia with 1,867 stores in those five countries and an additional 346 stores in Poland and 73 in Latvia. The business generates significant free cash flow and is immediately accretive to earnings.
The retailer's 2011 revenues were $12.8 billion with EBITDA of $526 million. Their combined businesses generate $34.5 billion in revenues and $1.3 billion in EBITDA profits from 8,460 stores. While Couche-Tard will contribute about 60% of EBITDA, Statoil's EBITDA margin is actually 50 basis points higher than its Canadian counterpart. Tweak the margin a little bit and this deal pays for itself and then some in five or six years. When 2,300 stores land on your door step, you don't look a gift horse in the mouth. Tractor Supply (Nasdaq:TSCO) is a perfect example of what can happen when you take a substantial leap of faith. In 2002, it bought 85 locations from Quality Stores, its biggest competitor. It had never made an acquisition before, yet the move paid huge dividends, sending it on a completely different growth trajectory. Since the deal was announced in January 2002, its stock is up 2,100%. When the door to an opportunity opens, you must walk through. Couche-Tard is knocking at the door.
Its American Experience
In 2003, Couche-Tard acquired Circle K stores from ConocoPhillips (NYSE:COP) for $804 million. At the time, many of the same questions that have been raised about the Statoil deal were raised about Circle K. All that deal did was double the size of the company and increase its EBITDA by 140%; not to mention provide the platform on which to make further follow-on acquisitions. In nine years, Couche-Tard has integrated 3,003 stores south of the border into its system. In that time, its stock's grown about 350% compared to 50% for the S&P/TSX Composite Index. It was a completely transformational deal that was carried out with flawless execution. This new deal presents even less integration issues and the company has nine additional years of experience. When Couche-Tard closed the Circle K deal in late 2003, its adjusted net debt was 4.2 times earnings before interest, taxes, depreciation, amortization and restructuring or rent costs (EBITDAR). It was down to 3.2 times EBITDAR 12 months later. It anticipates an adjusted net debt after closing of 3.8 times EBITDAR and 3.0 times EBITDA within 18 months. Nothing in the world of business is a slam dunk. However, past experience would suggest its projection is more than achievable, especially when you consider the state of the Scandinavian economies. It's extremely smart paying a little more for a situation that's far more stable. It will make it much easier to begin paying down debt while assessing and understanding the European market. Consider the U.S. its training wheels.
The Bottom Line
Alimentation Couche-Tard is the biggest convenience store operator in Canada, one of the biggest in the U.S. and now the biggest in Scandinavia. Statoil, by the very nature of its exploration and production business, had a difficult time buying assets from competitors like BP and Esso. Realizing this put a cap on its retail growth and wanting to focus on its upstream business, Couche-Tard provides the Norwegian government with a win/win proposition. Considering it's paying less for Statoil Fuel and Retail than Casey's current value; I believe it paid a reasonable price for a prime asset. Five years from now I think you'll agree.
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At the time of writing, Will Ashworth did not own shares in any of the companies mentioned in this article.