Marriage of convenience? What’s driving Couche-Tard’s play for Carrefour

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Alimentation Couche-Tard Inc. chief executive Brian Hannasch once called the Canadian cigarette and soda peddler “the largest $50-billion company nobody’s ever heard of.”

Not anymore.

The historically low-key retailer, which held its first annual investor day in 2018 and takes only questions submitted in advance during earnings calls, is now trying to pull off a takeover of French grocery giant Carrefour – thrusting itself into the glaring spotlight of European business and politics. Should it be successful, it could be the biggest-ever foreign takeover of a French company at a current estimated enterprise value topping US$37-billion.

Analysts and investors remained largely in the dark Thursday about Couche-Tard’s motivation for the acquisition and the precise mechanics for paying for it. Shares of the Laval, Que.-based company, which owns the Circle K chain, fell another 2 per cent Thursday after a 10-per-cent drop the previous day as stockholders tried to understand the logic of a potential deal and how much their shares might get diluted through a likely equity sale.

Paris-based grocery giant Carrefour’s business operations

Meet Brian Hannasch, the American in charge of a beloved Quebec brand

There is also political hostility to the takeover in France. French Labour Minister Élisabeth Borne said she didn’t want to question Carrefour’s current shareholder structure and favoured allowing the company to pursue its strategy. That added to opposition from French Finance Minister Bruno Le Maire, who told Reuters the government wanted to preserve the country’s food security and sovereignty. “Having Carrefour being bought by a foreign company would be a major difficulty for all of us,” he said.

Those arguments don’t hold because Carrefour generates a majority of its revenue outside France and the country’s food distribution market is highly fragmented, according to industry specialists such as Dalhousie University’s Sylvain Charlebois. Others say they believe concerns about jobs are overblown because Couche-Tard would not likely seek to move existing Carrefour stores. The Canadian company is highly decentralized in its management and operations, relying on the expertise of local leaders in every market where it does business.

“Preliminary comments by the French Finance Minister are consistent with French government posturing in similar proposed foreign-led takeovers, notably its objection to the PepsiCo / Danone deal in 2005 and rigorous conditions imposed on GE’s acquisition of Alstom SA’s power business,” analysts at Royal Bank of Canada said. “With scarce details about the terms and structure of the proposed transaction between Couche-Tard and Carrefour, the initial reaction is to be expected.”

King of convenience: How Couche-Tard’s Bouchard built an empire

Couche-Tard is now Canada’s largest company: How a chain of convenience stores beat the banks

top 10 outbound canadian mergers

If completed, the Couche-Tard takeover of Carrefour would be

the second biggest Canadian takeover of a foreign company

Ranking

value*

Country

Acquirer

Year

Target

U.S.

Enbridge

Spectra Energy

2016

$43.1

France

Alim. Couche-Tard

Carrefour

2021

35.1

U.S.

Valeant Pharms

Salix Pharmaceuticals

2015

15.9

U.S.

Investor Group

Johnson Controls

2018

13.2

U.S.

TransCanada

Columbia Pipeline

2016

12.0

U.S.

CPPIB Credit Invest.

Ge Antares Capital

2015

12.0

U.S.

Valeant Pharms

Bausch & Lomb

2013

11.6

U.S.

Brookfield Asset

Forest City Realty Trust

2018

11.4

U.S.

Fortis

ITC Holdings

2016

11.1

U.S.

Manulife Financial

John Hancock Fin.

2003

11.1

*Including net debt of target (U.S. billions)

JOHN SOPINSKI/THE GLOBE AND MAIl

SOURCE: refinitiv eikon

top 10 outbound canadian mergers

If completed, the Couche-Tard takeover of Carrefour would be

the second biggest Canadian takeover of a foreign company

Ranking

value*

Country

Year

Acquirer

Target

Enbridge

2016

U.S.

Spectra Energy

$43.1

Alim. Couche-Tard**

2021

Carrefour

France

35.1

Valeant Pharms Int’l

2015

Salix Pharmaceuticals

U.S.

15.9

Investor Group

2018

Johnson Controls-Power

U.S.

13.2

TransCanada

2016

Columbia Pipeline Group

U.S.

12.0

CPPIB Credit Invest.

2015

Ge Antares Capital

U.S.

12.0

Valeant Pharms Int’l

2013

Bausch & Lomb

U.S.

11.6

Brookfield Asset Mgt.

2018

U.S.

Forest City Realty Trust

11.4

Fortis

2016

ITC Holdings

U.S.

11.1

Manulife Financial

2003

John Hancock Fin. Svc.

U.S.

11.1

*Including net debt of target (U.S. billions)

**Potential deal

JOHN SOPINSKI/THE GLOBE AND MAIL, SOURCE: refinitiv eikon

top 10 outbound canadian mergers

If completed, the Couche-Tard takeover of Carrefour would be the second biggest Canadian

takeover of a foreign company

Ranking value* (U.S. billions)

Acquirer

Year

Target

Country

Enbridge

U.S.

Spectra Energy

2016

$43.1

Alim. Couche-Tard**

France

Carrefour

2021

35.1

Valeant Pharms Int’l

U.S.

Salix Pharmaceuticals

2015

15.9

Investor Group

Johnson Controls-Power

U.S.

2018

13.2

TransCanada

U.S.

Columbia Pipeline Group

2016

12.0

CPPIB Credit Invest.

U.S.

Ge Antares Capital

2015

12.0

Valeant Pharms Int’l

U.S.

Bausch & Lomb

2013

11.6

Brookfield Asset Mgt.

U.S.

Forest City Realty Trust

2018

11.4

Fortis

U.S.

ITC Holdings

2016

11.1

Manulife Financial

U.S.

John Hancock Fin. Svc.

2003

11.1

*Including net debt of target

**Potential deal

JOHN SOPINSKI/THE GLOBE AND MAIL, SOURCE: refinitiv eikon

Quebec’s Economy Minister, Pierre Fitzgibbon, told reporters Thursday that his government was in touch with the government of French President Emmanuel Macron “to promote the fact that Couche-Tard could be a good owner” for Carrefour in the same way that French train maker Alstom will be a good owner of Bombardier’s rail business. That deal is expected to close later this month.

Carrefour’s top three shareholders, which include the Arnault family that controls luxury goods purveyor LVMH, are likely open to sale discussions after enduring years of underperformance in their investment. None has spoken publicly about Couche-Tard’s offer of €20 ($31) per share, which values Carrefour equity at US$20-billion.

Couche-Tard founder and chairman Alain Bouchard is now turning to a target outside the company’s core convenience store competency after putting on ice a US$5.6-billion offer for gas station chain Caltex Australia and seeing rival Seven & i Holdings Co. walk away with Marathon Petroleum’s Speedway gas stations last summer for US$21-billion.

Mr. Hannasch has said the deal for Speedway was done “at a value that quite honestly I can’t understand.” He said Couche-Tard would only pursue takeovers “if the value is there.” Still, making such a big bet on the lower-margin and hypercompetitive supermarket sector has taken many people by surprise.

On paper, the financial logic for a deal appears to be sound. Because Couche-Tard has been so successful, investors have been willing to pay a premium to own its shares. Carrefour’s stock market performance, meanwhile, has struggled. The difference between these market premiums allows Couche-Tard to boost its bottom line for cheap – in other words, pay 75 cents to get a dollar of profit in return.

But the strategic fit isn’t obvious. The two companies have almost no geographic overlap and Carrefour doesn’t sell fuel, which undermines the typical cost savings achievable in such transactions. Couche-Tard typically aims to achieve savings worth between 30 per cent and 50 per cent of a target company’s earnings before interest, taxes, depreciation and amortization.

Couche-Tard has achieved a return on capital employed averaging 15.2 per cent over the past decade, a measure of the amount of pretax profits it can generate from the money employed in its business. That is higher than most other convenience retailers and it proves the company’s big takeovers in recent years – chiefly the purchase of Texas-based CST Brands for US$4.4-billion in 2017 and the purchase of Statoil Fuel and Retail SA for US$2.6-billion in 2012 – have been on the mark.

“[Couche-Tard] has an extensive track record of making astute acquisitions, so we would like to give it the benefit of the doubt,” TD Securities analyst Michael Van Aelst said in a note. “But without some convincing arguments, we struggle to see the strategic rationale. Could Couche-Tard be taking this step because opportunities to acquire [convenience stores] at reasonable valuations are increasingly becoming rare or is it to diversify the company away from fuel?”

Until recently, few people, including those in Couche-Tard’s home base of Quebec, knew the story of how Mr. Bouchard rose from near-poverty, living in a trailer with five siblings, to the top echelon of Canadian business. A biography released in late 2016 finally raised the curtain on the man and his motivation.

It was an aggressive, risk-taking climb, one fuelled by a desire to make his own life and not depend on others after his father lost everything in a bankruptcy. As Quebec’s francophone majority was experiencing its own ascension during the Quiet Revolution in the 1960s, Mr. Bouchard launched himself into a decades-long entrepreneurial effort to build Couche-Tard that eventually made him a billionaire.

When Mr. Bouchard was a kid, he sold sandwiches his mother made to construction workers to help make ends meet. Time and again, he has proven his skill at making deals and turning underperforming stores into profit-making machines through tactics such as forcing landlords to renegotiate leases. Early on, he sometimes did the renovation work at stores himself, bashing down walls and installing coolers.

Couche-Tard doesn’t do takeovers just to maintain the existing revenue and profits of its new stores. The company has a track record of improving those metrics by controlling costs, keeping good employees, improving purchasing and introducing other innovations. Private labels play a part too. Its gummi bears, windshield washer fluid and other proprietary products increase differentiation from rival retailers and yield higher profit margins.

Said Mr. Charlebois: “Some people are asking, ‘You’re in the convenience store business, how can you become a grocer?’ They can, because they’ve committed to supply chain as a key part of their strategy. It’s different than other major players in the convenience store business. They’re not a simple convenience store operator. They’re way more than that.”

Whether Mr. Bouchard can bring that magic to bear on Carrefour, or whether investors or the French government will let him, remains to be seen.

With reports from Tim Kiladze and Susan Krashinsky-Robertson

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