Canadian convenience store king Alain Bouchard has been scanning the Asia-Pacific region in recent years, looking for a takeover target that would give his Alimentation Couche-Tard Inc. a toehold for its third leg of growth after North America and Europe.
But in making a US$5.8-billion non-binding offer for Caltex Australia Ltd., Couche-Tard’s founder and executive chairman is veering a bit off his usual deal script and onto what could be a tangled path of asset disposals. And there’s an added hitch: Caltex doesn’t seem to believe an outside buyer is the answer to its recent financial struggles.
Caltex unveiled plans this week for a spinoff and initial public offering for a minority stake in 250 of its gas station sites in an attempt to “realize significant value” for shareholders, a move some observers are interpreting as a defensive manoeuvre against Couche-Tard’s offer. Couche-Tard says that plan needs to be scrapped for its proposal to stand.
In addition to extensive fuel and retail operations in Australia, Caltex’s interests stretch into neighbouring countries. The company amounts to the kind of distressed takeover target Couche-Tard has done well with in the past, said Brian Madden, senior vice-president and portfolio manager with Toronto-based Goodreid Investment Counsel, which holds Couche-Tard shares among $350-million in assets under management. But it’s different in that it comes with extra baggage not seen in previous deals, he said.
“It’s messy," Mr. Madden said. “They don’t necessarily want or need to own a refinery or tank farms or pipelines.”
Laval, Que.-based Couche-Tard on Tuesday confirmed it made an unsolicited US$5.8-billion cash offer on Nov. 18 for Caltex, one of Australia’s largest transport fuel providers and retailers. The offer, which Caltex said it would consider, was sweetened from an initial proposal made in October.
The total value of the deal, including the assumption of debt, is 10-billion Australian dollars or about US$6.7-billion at current exchange rates. Couche-Tard, which operates 16,000 stores worldwide, mostly under the Circle K banner, has about US$7-billion in balance sheet capacity available and should be able to fund the entire transaction, RBC Capital Markets said.
It is the biggest bet yet by Mr. Bouchard and Couche-Tard chief executive officer Brian Hannasch, not only because it would be the company’s highest-priced takeover but also because it’s the furthest away from its North American base. In a sign of the potential pitfalls in an unfamiliar region, the company has hired Goldman Sachs as a financial adviser – reversing its typical instinct to forgo investment banking advice on big deals.
“We believe this is a very compelling offer for Caltex shareholders, representing an excellent premium and certainty of value today,” Mr. Hannasch said in a statement Tuesday. “[Our] management team has been looking into the Asia-Pacific region for several years as a potential market for our continued growth and we see many opportunities.”
Caltex has a network of businesses across Australia and New Zealand, including the Lytton crude oil refinery in Brisbane, fuel import terminals, 94 storage and distribution hubs, and some 300 kilometres of pipelines, according to its most recent annual report. It also has a network of 800 retail stores directly under its control that sell gasoline, food and other items.
Caltex also owns Ampol, an international petroleum products trading and shipping team based in Singapore. Ampol manages supply to Caltex’s Gull New Zealand operation, as well as to independent fuel company Seaoil in the Philippines, in which it owns a 20-per-cent equity interest, and other international wholesale customers.
All of that means there could be significant divestiture work ahead for Couche-Tard. Analysts say if it is successful with its bid, Couche-Tard would likely be searching for buyers for many, if not most, of the non-retail assets and keep what it really wants, which is Caltex’s underperforming convenience store business.
Couche-Tard has taken over fuel infrastructure assets before, notably when it bought Statoil in 2012, but those were more peripheral. The scope of potential aggravation in this deal suggests the prize is rich, according to Desjardins Capital Markets analyst Keith Howlett.
“Given the complexity of the transaction, including the divestiture of non-retail assets, we conclude that Couche-Tard management foresees significant upside to the retail fuel and convenience business in Australia,” Mr. Howlett said.
Caltex spelled out the corner store potential in a 2018 investor presentation, saying the market is underserved. The company said consumers in the United States, Japan and Britain spend two to three times more per capita at convenience stores than Australians, adding the gap can be explained in part by Australia having a greater density of supermarkets.
Pressure has mounted on Caltex to improve its financial performance, which has been hurt by margin pressure from higher oil prices and slowing demand for fuel from agricultural and construction customers. The company’s core earnings before interest and taxes have fallen for the past three successive six-month periods, RBC analyst Ben Wilson said.
That might make shareholders more receptive to Couche-Tard’s offer, which amounts to a nearly 16-per-cent premium to Caltex’s closing price on Monday. The Canadian company is also offering a special dividend to certain Caltex investors.
“The bid price from [Couche-Tard] is in the ballpark," Mr. Wilson said, "although a small bump may be needed to push a deal over the line.”