Couche-Tard sees better environment for M&A as it seeks out next big deal

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Canadian convenience store giant Alimentation Couche-Tard Inc. says it is seeing an improving environment for mergers and acquisitions as it hunts for its next big deal after a five-year lull.

The Laval, Que.-based company, which operates about 14,100 stores worldwide mostly under the Circle K banner, is seeing deal flow in the sector picking up while competition for assets is easing, chief executive officer Brian Hannasch said Wednesday. Activity has picked up in the United States in particular in recent weeks, buoying prospects for a transaction, he said.

“I kind of joke with the team that Warren Buffett hadn’t done a deal in five years either so we shouldn’t feel so bad,” Mr. Hannasch said in an interview with The Globe and Mail. “But he’s finally done a couple lately. So it’s our turn now.”

Couche-Tard has ballooned in size from a regional convenience store chain to a global titan through acquisitions and organic growth. It hasn’t made a major purchase since buying Texas-based CST Brands for US$4.4-billion in 2017, highlighting a disciplined approach to deal-making.

The retail giant wanted to buy French grocer Carrefour SA last year but the plan was thwarted after the two companies failed to provide a sufficient heads-up to the French government, which vowed to oppose the transaction. Couche-Tard is seen as the leading candidate to buy Petro-Canada, whose owner Suncor Energy Inc. is considering options for the storied chain, but analysts say other buying opportunities are also likely to surface in the months ahead.

The competitive environment for deals has changed as higher interest rates limit the ability of some buyers to access capital, and that will benefit Couche-Tard as valuations come down, Mr. Hannasch said. “When you look at who’s been competing with us over the last four or five years, it’s been people that are using the high yield markets and private equity partnerships. And those are largely sidelined today. So we feel good about that.”

Couche-Tard analyzed several takeover opportunities in recent years but “just couldn’t get our head around the prices they were selling for,” Mr. Hannasch said. The company has made some of its best acquisitions in times of economic distress where capital markets weren’t available to all buyers and people were uncertain about the future, he said. The deal for CST, as well as the takeovers of Statoil ASA’s retail network and U.S. convenience operator Pantry Inc., are examples, he said.

Suncor and U.S. activist investor Elliott Investment Management Inc. announced an agreement in July in which they said the company could divest Petro-Canada’s 1,500-site retail network “with the goal of unlocking shareholder value.” Elliott has pegged the value of the business at $4.7-billion to $9-billion.

Antitrust concerns would likely prevent Couche-Tard from acquiring all of Petro-Canada, leaving other companies such as Parkland Corp. to scoop up parts where there is little overlap. Couche-Tard was forced to divest roughly 20 per cent of the 226 Wilsons gas stations and convenience stores it purchased in Atlantic Canada to resolve concerns by Canada’s Competition Bureau.

Parts of Petro-Canada would be “a fantastic fit” for Couche-Tard’s network, Mr. Hannasch said. “But like with Wilsons, I think we’d have to have solutions to help us accommodate the pieces that wouldn’t fit with us.”

Several oil companies have jettisoned their Canadian retail networks in recent years, such as Imperial Oil Ltd., Cenovus Energy Inc. and Chevron Corp. Couche-Tard, Parkland and 7-Eleven have been buyers.

Couche-Tard on Wednesday reported a net profit of US$872-million or 85 cents a share for its latest quarter ended July 17, a 14-per-cent increase over the same period last year that handily beat the 73 cents a share analysts had expected. Revenue rose 37 per cent to US$18.6-billion.

The company was able to squeeze out higher profit margins from selling gasoline, even as fuel volumes declined. It was also able to limit the growth in operating expenses seen over the previous two quarters from areas like labour, energy and rent inflation.

“During periods of oil price declines, as we are seeing now, retail fuel margins are typically high as the industry is slow to bring down pricing at the pump,” Bank of Montreal analyst Peter Sklar said in a research note. “As a result, the recent decline in oil prices supports the possibility of continuing strong retail fuel margins in the U.S. and upward earnings revisions.”

Consumer behaviour is changing in the face of higher gasoline prices and inflationary pressures, Couche-Tard said. Drivers are buying less fuel at each fill-up. And many customers are also switching to lesser expensive brands for food and drink, a boon for the company’s private-label products such as chips and bottled water.

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