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Investors love Alimentation Couche-Tard Inc., especially when the acquisitive Laval, Qc.-based convenience store giant is buying sizeable chains. The company has a flawless track record for identifying and integrating acquisitions, wringing efficiencies, improving merchandising and bumping up earnings. But it won't do a deal at any price. That's something investors should remember as talk heats up that Couche-Tard could be a leading contender to buy oil giant Hess Corp.'s network of 1,350 retail outlets throughout the U.S. eastern seaboard.
Couche-Tard's success rate is due to the fact that it walks away from a lot of potential deals, especially if they get pricey. That happened in 2010, when Couche-Tard abandoned its pursuit of U.S. chain Casey's General Stores Inc. after refusing to substantially boost its offer for the chain's 1,530 stores in the U.S. midwest. Casey's would have been the perfect fit for Couche-Tard, but not if it cost too much. Investors should be thankful that the company's sharp-pencilled management team, led by founder Alain Bouchard, is so parsimonious and patient, even if it means waiting years between big deals.
The convenience store business in the U.S. is still fragmented, and the best opportunity for a company the size of Couche-Tard (revenues in the first three quarters of its current fiscal year: $26.9-billion) is to buy a large network in one go. However, most of the fuel giants in North America have divested their chains, while larger independents have become the belles of the ball, attracting the interest of not just giants Couche-Tard and 7-Elevent, but other industry consolidators, including Marathon Petroleum Corp. and Delek U.S. Holdings, Inc.
Now, Hess has reportedly hired Goldman Sachs to sell its store network. Desjardins Capital. Markets analyst Keith Howlett estimates the Hess stores do about $11-billion (U.S.) to $12-billion in revenue per year, generate $300-million to $400-million in operating earnings, and would likely fetch upwards of $2-billion – a sizeable bite even for Couche-Tard.
Why might the deal be less attractive to Couche-Tard than others? Three reasons. If bids aren't attractive enough, Hess will reportedly spin off the stores. Couche Tard has been in this position before, standing put when Valero Energy Corp. recently spun off its store network. Second, Mr. Howlett says Couche-Tard is likely only really interested in the northern half of Hess's network; it already has ample stores in the southeast, where the remaining Hess outlets are located.
Finally, the Hess stores in the northeast appear to be "quite productive," Mr. Howlett said in a note Friday, with above-average sales and boasting a "well-developed food-service offering" from Dunkin' Donuts. Couche-Tard typically buys undermerchandised stores and brings its know-how and better food-service offerings, increasing productivity. If that opportunity isn't as available with Hess, it will likely be less interested.
Investors shouldn't despair: Couche-Tard remains one of the best-managed retailers anywhere. And with its foray into Europe via last year's purchase of Statoil ASA, it now has growth opportunities on two continents. The company has made no secret of the fact it's looking for another big deal. But if Couche-Tard's leaders were the sort who pull the trigger too soon, the firm wouldn't be in such robust health now.
Sean Silcoff is a contributor to ROB Insight, the business commentary service available to Globe Unlimited subscribers. Click here for more of his Insights , and follow Sean on Twitter at @seansilcoff .
Sean Silcoff