Nearly 12 months have passed since Canadian pass rusher Alimentation Couche-Tard called its first blitz on Casey’s General Store, seeking to tackle the Midwestern juggernaut, only to be met with equal resistance.
Tug of war, fist meets palm, eyeball eyeing eyeball: Come up with your pet metaphor and you have the biggest confrontation to hit the convenience channel in recent memory.
We’re not talking about acquisitions, not even of the biggest sort, as when Couche-Tard cemented its American presence by plucking the 2,200-store Circle K chain from ConocoPhillips.
That was between willing partners. This is a hostile takeover.
“This is an anomaly,” says a veteran Midwestern operator. Like most of the dozen retailers, industry analysts and financial experts interviewed for this story, this operator agreed to speak openly only on condition of anonymity.
“There is a lot of history with Casey’s. But this does show the dangers of going from a closely held company to a public company. You get the large institutional investors buying large numbers of shares. You suddenly lose control of your own company. That’s what Casey’s is struggling with right now.”
For the nearly 5,900-unit Couche- Tard, Casey’s represents the latest in a decade-long push to grow through acquisitions, first in Canada and, over much of the past decade, in the United States. If successful, the company becomes the largest c-store operator in North America.
For Casey’s, it’s a story of self-preservation and values, of continuing to service prairie outposts along the rows of cornfields and long-distance bike routes away from the urban bustle. In a sense, it’s Big City vs. Small Town. And the outcome remains untold.
Indeed, just days before CSP went to press, 7-Eleven, the country’s largest convenience chain, had jumped to the fore, forcing Couche-Tard to recalibrate its strategy. (See 7-Eleven sidebar on p. 84.) On Sept. 23 Casey’s shareholders were to vote on the future of the company, contemplating three viable options: to remain independent, to enter into exclusive negotiations with either Couche-Tard or 7-Eleven, or to open the door to additional suitors.
This story, however, delves into the culture and business thinking behind Couche-Tard’s dramatic yearlong hostile takeover bid of the country’s largest Midwestern chain, Casey’s.
A DEAL FOR THE SEASONS
Early Friday morning, April 9, news flashes blanketed e-mail inboxes. Couche-Tard let the world know it was offering $36 per share, or $1.9 billion for the 1,531-store operator.
Shares in Casey’s jumped nearly 24%. The deal rattled the proverbial saber, and an industry suddenly sharpened its focus on the channel’s deal of the century.
“We have an extremely high regard for your operations, management and talented employees,” Alain Bouchard, Couche-Tard’s chief executive, wrote to Casey’s board of directors.
Suggesting that the Midwestern chain is undervalued, Bouchard continued, “Our operations are highly decentralized and we have a track record of keeping most of the existing management and employees in place as we did in the Circle K acquisition and our other transactions.”
The letter was made public and came six months after Couche-Tard had tendered a similar offer, but in private. To Casey’s board, Bouchard wrote: “Despite our repeated efforts starting in October 2009 to engage in negotiations, and without the benefit of discussing our proposal with us or our advisors, your board of directors unanimously rejected our proposal. Our goal remains to work with you to agree to a negotiated transaction.
“However, due to your unwillingness to engage in discussions and the unique opportunity presented by our proposal for your shareholders to realize full and immediate value, we are compelled to make this proposal known to your shareholders.”
Before the shock could settle, Casey’s rejected the offer with disdain. “Couche- Tard is trying to acquire U.S. companies on the cheap,” Casey’s president and CEO Robert Myers told shareholders.
The offer reflects a 7.4x EBITDA multiple with an average $1.3 millionper- store price. On the surface the tender seemed fair, one Bouchard proclaimed “presents an exciting opportunity to create significant value for our respective shareholders, employees, business partners and other constituencies.”
But Myers rejoined that Casey’s is growing, is itself making acquisitions, expanding into new turf and upgrading the quality of its portfolio.
It’s a cat-and-mouse play that began publicly in the spring, drifted into summer and now lazes into fall.
CORN AND CASEY’S
From Sioux City, S.D., Stewart, a cross-county biker, pedals his 21- speed with urgency. A native New Yorker, he shares a mid-July post from a journal he is keeping about a trek that begins in Manhattan and will conclude in Oregon.
“Towns between 500 and 2,000 people will generally have only one store selling food, almost always a Casey’s General Store, which also sells gas. … There are very few mom-and-pop businesses in small-town America that I have seen. What is out here is Casey’s.”
Whether to an insider or a Facebook friend, Casey’s is unmistakable. It is the crop of the c-store heartland. For many in the upper Midwest, it is their daily jaunt, their unmistakable friend. It is their coffee and store-made-doughnut stop for breakfast. It is their pizzeria in the afternoon and evening.
“They’re one of the biggest pizza purveyors in the area they serve,” says a longtime c-store observer familiar with the company. “In a lot of the towns, Casey’s is the only place where you can get pizza. So it’s not just a c-store.”
Should Couche-Tard reap Casey’s bounty, one wonders about not only the effect of losing a homegrown brand (and possibly several local vendors) but also about how the Quebec company—with stores across much of the American landscape and with semi-autonomous units to govern them—will adapt to the ubiquity of small-town America.
Based on Couche-Tard’s success with integrating complex chains, from Dairy Mart to Circle K, as well as modest and moderate-sized stalwarts such as Bigfoot, there is little doubt from a technical view that the company would succeed in right-fitting Casey’s into its portfolio of what would be nearly 7,500 sites across North America.
Operationally, Couche-Tard runs a different kind of store than Casey’s, and experts suspect that here, too, Couche-Tard would likely find the right mix of local favorites, its own private- label successes and classic c-store fare to make the stores work.
What is questioned is culture. Can Couche-Tard create a persona that binds the Casey’s core consumer? Can it deliver on the emotional appeal that Casey’s routinely fields on Facebook and other sites? Take a summertime Casey’s promotion on its Facebook page and website: “This week’s word of the week is SWIMMING! Now that you have the word of the week, you can go to caseys.com and enter to win free gas for a year!”
Joe H., a loyal customer, chimes in: “Free gas for a year would be sweet.”
And when the company wishes its Facebook friends a happy Independence Weekend, Tina M. types in, “Please be kind ordering pizzas from Bob at the Manning store. Better yet, make sure to leave him a Pepsi!!! Love you Dad!!”
Or, as one recent East Coast visitor observed during a stop at a Casey’s store: “They were offering free pony rides. I’ve never seen that at a c-store but for Casey’s, it must work.”
Indeed, for those operating on busy thoroughfares, robust suburbs and bustling urban markets, Casey’s core store may come as somewhat of a throwback. Its designs are generally milquetoast, forecourts frequently fielding no more than four fueling dispensers, and much of its offer seems anachronistic, with groceries, motor fuels and general merchandise such as razor blades stocking some of the aisles. The chain did not have scanning in all stores until only a few years ago.
And yet, the company in June reported a record performance for fiscal year 2010, which ended April 30. Grocery and other merchandise increased more than 6% to $1.1 billion. And the strength of the company’s in-store offer—fountain and made-on-site foodservice—grew at a steady 4.2% at same stores, with a healthy margin of nearly 64%.
Based on pretax earnings of more than $181 million, Casey’s averaged $121,000 in per-store pretax profit (based on approximately 1,500 stores), compared to $89,000 per store for Alimentation Couche-Tard. (Couche- Tard’s figures are deflated because nearly 60% of its Canadian stores do not sell fuel. A look at corporate revenues shows Couche-Tard with higher per-store figures of $3.7 million in North America vs. $3.1 million for Casey’s.)
“Casey’s stores may not overall be as modern or sophisticated as others, but they know their customers well and they make great margins on their foodservice,” says one analyst familiar with the company.
A RADICAL PROPOSAL
Such sentiment aside, a number of industry experts interviewed for this story say Couche-Tard would bring an aggressiveness and growth mentality to a company whose annual projections, until recently, had been anchored in consistency and stability.
Or, as one observer suggested, “If Casey’s and Couche-Tard were baseball teams, Casey’s would be the Minnesota Twins, happy with solid returns; and Couche-Tard would be the New York Yankees, not satisfied with anything but winning the World Series.”
When asked about the companies’ respective operational models, another industry expert said, “Couche-Tard might take an MBA execution approach. Casey’s is more meat and potatoes.”
Veteran c-store consultant Dick Meyer is intrigued by this battle of the c-store titans. “These are two honorable men,” he says of Couche-Tard’s Bouchard and Myers of Casey’s. “I do think what’s going on is very unique to our channel. You don’t see hostile takeovers, and you have two very different cultures.
“Casey’s has never been known for its flair, not does it have to,” says Meyer. “They know their communities, they know their people. In many pockets you would be hard-pressed to find someone who doesn’t have a family member or a friend who has worked at Casey’s. There’s a lot of history.
“Couche-Tard is different. They’re one of very few who could even consider making a bid on Casey’s, and their model is much more centered on hitting certain returns.”
Asked whether he believes a deal will be consummated, Meyer, like others interviewed, is cautious and calls it 50- 50. But if Couche-Tard is successful, Meyer, who has journeyed over the years through much of Casey’s terrain, offers the following advice: “If I were a shareholder for Couche- Tard, I would be disappointed if they changed the name from Casey’s to Circle K. … Why would Couche-Tard forfeit that brand equity? It’s very powerful.”
Meyer suggests that Couche-Tard could use Casey’s as a platform “brand” to grow in the upper Midwest. “Couche-Tard can do a logical consolidation of other chains in a part of the country that has low employee turnover and unusually consistent customer loyalty,” he says.
“When you start with those unique features and employ Couche-Tard’s professional aggressiveness, the opportunity exists that a Casey’s-Couche-Tard combination could double the number of stores in the Midwest. It’s an area that’s highly fragmented and where there are not many other major competitors that are likely to attain the same result.”
Indeed, one of the inherent benefits Casey’s enjoys is that its markets largely—though not exclusively— bypass the possibility of battles with well-heeled operators Kwik Trip, Holiday Stationstores and Kum & Go.
Like a missionary finding converts off the beaten path, Casey’s has built a 51-year record of successfully opening stores where most won’t venture.
WHERE TO GO FROM HERE
Among analysts and financial experts, there is great debate: Will the deal happen?
In late July, Casey’s board announced a half-billion-dollar recapitalization plan that essentially outbids Couche-Tard’s tender, by offering to buy back the company’s common stock at a price of $38 to $40 per share. “This, to me, is one of the most significant moves that happened since we learned about Couche-Tard’s desire to buy Casey’s,” says one financial expert.
“This is Casey’s last-ditch effort. At a minimum, it drives up the price and forces Couche-Tard to think about whether to talk away from the deal or to raise their offer.”
And Couche-Tard chose to raise its offer. Several observers interviewed praise Couche-Tard’s rigorous self-discipline and agree that the company will not overpay to tuck Casey’s into their expanding portfolio.
“They may go to $40 a share, but we’re not going to see multiples of 8 or 8.2 (EBITDA),” one financial veteran says. “That wouldn’t make financial sense, and it’s not how Couche-Tard operates based on their track record.”
In fact, as of the second week of September, Couche-Tard had muscled up its offer from $36.75 per share to $38.50. In this quake of oneupmanship, the tender rendered a tangible rumble. But as the plates threatened greater movement in Couche-Tard’s favor, Casey’s quickly delivered its own thrust, confirming that venerable c-store giant, 7-Eleven, had jumped to the fore with a $40- per-share tender.
A bluff? Absolutely, some analysts first thought. But while 7-Eleven remained mum, U.S. and Canadian retail experts began to murmur about the greatest acquisition fight in c-store history, with North America’s two biggest chains vying for the U.S. Midwest’s largest player. Many have assigned Sept. 23 as the fateful day, when Casey’s shareholders convene to vote on the future of this respected operator. The company could enter into takeover talks with one company and decide at the end of the day that it is best to remain independent. Or, just as possibly, it could land in the hands of 7-Eleven or Couche-Tard.
In an era of historically low interest rates and, for powers such as Couche- Tard and 7-Eleven, pocketfuls of cheap money, it may be hard to imagine the Casey’s name surviving for long. And when one looks at Couche-Tard’s cavalier expansion over the past decade, it is hard not to believe that Casey’s represents the pinnacle of its acquisition prowess.
It was nine years ago when Couche- Tard sprung onto the American scene with its purchase of 225 Bigfoot stores from Columbus, Ind.-based Johnson Oil Co. “We are very happy to announce this agreement after a thorough study of the U.S. market,” Bouchard said, in a seemingly prescient manner, of the company’s relatively modest $66-million foray onto U.S. soil. “It enables us to make an initial and promising breakthrough in the United States, in the high-potential Midwest market.” Little has changed. The Midwest remains highly fragmented and rife with potential consolidation.
For Couche-Tard—as well as for 7-Eleven—the acquisition of Casey’s may not ultimately hinge on classic financial multiples, but on the ability to access vast dollars at a highly favorable interest rate.
In the end, it may be too expensive for Couche-Tard or 7-Eleven not to buy Casey’s. Yet at the same time, for an iconic Midwestern brand, the final straw may be less about the highest dollar than about holding onto its roots.
In This Corner
Alimentation Couche-Tard
Founded: 1988
Headquarters: Laval, Quebec
Store count: nearly 5,900 in North America, in 43 of the United States and the District of Columbia
Key Financials: Per-store pretax profit: $89,000 (based on approximately 4,400 corporate-run stores across the United States and Canada; only 40% of Canadian stores have fuel, whereas 90% of U.S. sites sell fuel.) Per-store revenues are $3.7 million in North America.
Casey’s General Stores Founded: 1959
Headquarters: Ankeny, Iowa
Store Count: 1,531 across 11 states
Key Financials: Per-store pretax profit of approximately $121,000 (based on a roughly 1,500-store count). Per-store average revenues are $3.1 million.
Casey’s Growth
2007: On April 12, Casey’s General Stores Inc. acquires 10 Holiday convenience stores in Nebraska and Iowa. 2008: At end of fiscal year 2010, Casey’s reports it acquired 37 stores and built 18 stores. New stores feature larger coffee and fountain offerings, made-to-order sub-sandwich program and expanded cooler capacity. 2011: Goals: to replace 20 stores with new, larger prototype, and expand into new markets and states, including contiguous markets in Arkansas, Michigan and Tennessee.
Couch-Tard’s 21st Century History: Let’s Make a Deal
2000: Alimentation Couche- Tard enters the 21st century as the ninth-largest convenience retailer in North America with 1,625 stores, including 460 with fuel islands. Company employs roughly 11,500 across its network and at head office.
2001: Couche-Tard breaks into the United States, acquiring 225 Bigfoot stores from Johnson Oil Co. Inc. Stores are located in the Midwest and boast a strong track record. • Acquires R-Con Centres Inc., Mac’s master franchise in Manitoba, and six Midwestern stores from BP.
2002 : Acquires 12 stores from Bruce Miller Oil Co., 16 Handy Andy Food Stores and 287 Dairy Mart stores in the Midwest. • In Quebec, acquires its first network of nontraditional stores, Tabatout, a network of 30 locations; move is part of a new strategy to develop a network of stores located in high-traffic areas such as office buildings, shopping centers, airports and subway stations.
2003: Acquires 92 Dairy Mart stores and 43 stores from Clark Retail Enterprises in the Midwest. • Enters into agreement with Allied Domecq Quick Service Restaurants (ADQSR), whereby Couche-Tard acquires the master franchise of Dunkin’ Donuts throughout Quebec: 104 Dunkin’ Donuts restaurants. • Acquires Circle K Corp. from ConocoPhillips Co. Deal includes 1,663 Circle K corporate stores across 16 States and a franchise/licensing agreement for another 627 stores.
2004: Acquires 22 stores from Shell Oil Products in Arizona. Stores are converted to Circle K
2005: Signs agreement with Allied Domecq Quick Service Restaurants to develop 65 Dunkin’ Donuts in Ohio over the next six years. • Adds 78 stores, all located in the United States. • Signs agreement with ConocoPhillips to convert an additional 75 stores of ConocoPhillips’ network to Circle K. • Couche-Tard grants a master franchise agreement to a subsidiary of Grupo Kaltex, S.A. de C.V., to open 250 Circle K stores over five years in Mexico.
2006: Acquires 90 stores operated under the Spectrum banner in Georgia and Alabama, 24 stores from Sparky’s Oil Co. in West Central Florida and 54 stores in Ohio from Holland Oil Co. • Acquires 236 sites from Shell Oil Products U.S. and its affiliate Motiva Enterprises LLC. Sites are converted to Circle K and are located in or near Baton Rouge, Denver, Memphis, Orlando, southeast Florida and Tampa. • Acquires 13 stores in Pensacola from Gichcor Inc. Stores operated under the name Groovin Noovin
2007: Acquires 53 stores that operated under the All Star banner from Star Fuel Marts LLC, located in Oklahoma City; and 28 stores that operated under the Sterling banner from Sterling Stores, LLC, northwest Ohio. • Does sale-leaseback transaction with Cole Capital for 83 properties.
2008: Acquires 15 stores operating under the Speedway banner from Speedway SuperAmerica, LLC, located in central Illinois. • Slows aquisition rate on heels of the recession
2009: Acquires 8 stores in central North Carolina from Accel Marketing LLC, which operates under the Accel banner.
Notable Quotables: Alain Bouchard vs. Robert Myers
Bouchard:
April 9, in a letter to Casey’s board of directors: “Despite our repeated efforts starting in October 2009 to engage in negotiations, and without the benefit of discussing our proposal with us or our advisors, your board of directors unanimously rejected our proposal. … However, due to your unwillingness to engage in discussions and the unique opportunity presented by our proposal for your shareholders to realize full and immediate value, we are compelled to make this proposal known to your shareholders.”
June 7, on nominating its own slate to the Casey’s board: “Though it remains our strong preference to enter into a negotiated transaction with Casey’s, we are committed to pursuing a combination of our two companies. We are confident that these nominees will serve in the best interests of Casey’s and its shareholders.”
Sept. 1, in response to Casey’s agreeing to buy 25% of its outstanding shares for $38: “We believe that our revised offer is the most attractive strategic alternative available to the Casey’s shareholders and delivers immediate cash value superior to what Casey’s can deliver continuing as a stand-alone company. … We remain ready, willing and able to complete a transaction with Casey’s expeditiously.”
Myers: April 9, as Casey’s rejects Couche-Tard’s unsolicited bid: “Dear Mr. Bouchard: We are very disappointed that you have decided to launch a hostile public campaign regarding your unsolicited proposal to acquire Casey’s for $36.00 per share in cash. As we previously informed you, our board of directors takes its fiduciary duties very seriously and unanimously determined to reject your proposal. … Your proposal significantly undervalues Casey’s and is not in the best interests of the corporation.”
June 8, in response to Couche-Tard nominating a slate to the Casey’s board: “Our board’s position is clear: Shareholders should reject Couche-Tard’s offer and not tender their shares. We believe this is a self-serving and transparent attempt by Couche-Tard to take significant value that rightly belongs to Casey’s shareholders.”
July 28, upon launching a $500-million recapitalization plan: “[The] $500-million recapitalization plan ... will generate significant value and enhanced returns for Casey’s shareholders while allowing us to continue executing on our strategic growth initiatives.”
Sept. 7, as Casey’s rejects Couche-Tard’s $38.50 tender and unveils a surprise: “Casey’s received a preliminary proposal from a strategic third party regarding a consensual transaction at $40 per share in cash.”
Timeline: Going after Casey’s
October 2009: Alimentation Couche-Tard privately approaches Casey’s General Stores with a bid to acquire the 1,531-store chain for $36 per share, estimated at $1.9 billion. Board unanimously rejects the offer and shows no interest in entering into negotiations.
April 9, 2010: Couche-Tard resubmits its offer to the Casey’s board of directors. But this time, the Quebec chain makes its bid public.
April 9: Casey’s publicly rejects the offer and deems Couche-Tard’s foray a hostile takeover bid.
June 2: Casey’s advises shareholders not to take any action regarding the Couche-Tard tender
June 7: Couche-Tard says it plans to nominate a nine-member slate to the Casey’s board at Casey’s 2010 annual meeting of shareholders.
June 11: Casey’s files a complaint in federal district court, alleging Couche-Tard has violated federal securities laws in connection with its unsolicited tender offer. Casey’s accuses Couche-Tard of manipulating markets to acquire outstanding shares at an artificially deflated price. The complaint centers on Couche- Tard’s divestment of nearly 2 million Casey’s shares shortly after making public its bid to acquire Casey’s. Couche-Tard emphatically denies any wrongdoing.
July 22: Couche-Tard increases its offer from $36 to $36.75 a share
June 28-30: Some Casey’s shareholders urge management and the board to enter into good-faith negotiations with Couche-Tard. Leading the charge is ClearBridge Advisors LLC, New York, which, as of late June, owned 1.6% of Casey’s common stock. A third suit is filed a month later by the Kentucky State District council of Carpenters Pension Trust Fund, which accuses the Casey’s board of “disproportionate, draconian and preclusive defensive measures” that have hurt investors
July 28: Casey’s board unanimously rejects Couch-Tard’s revised stock tender of $36.75 per share. Board also announces a $500-million recapitalization plan, essentially outbidding the proposed acquirer by offering to buy back the company’s common stock at a price of $38 to $40 per share.
Sept. 1: Couche-Tard counters with a new offer of $38.50 per share—$1.75 higher than its earlier tender. The move comes after Casey’s agrees to buy 25% of its outstanding shares for $38
Sept. 7: Casey’s board unanimously recommends against Couche-Tard’s latest bid. It also announces it has received a preliminary proposal from a strategic third party regarding a consensual transaction of $40 per share in cash. The third party is later revealed to be 7-Eleven.
7-Eleven’s Late Move on Casey’s
For more than a year, Alimentation Couche- Tard homed in on Casey’s General Stores. Plan after plan, bid after bid. Each was rejected, only to be followed by a mildly sweetened offer.
And yet, in early September, a new player swooped in and immediately captured the affections of Casey’s senior leadership.
Analysts have long agreed that only one potential bidder could topple Couche- Tard from its apex: 7-Eleven. The largest convenience chain in the world, 7-Eleven is sufficiently capitalized and boasts the necessary corporate infrastructure to undertake a deal of this scale.
While 7-Eleven declined comment as CSP went to press, Casey’s confirmed that the Dallas-based convenience behemoth had offered $40 per share, placing the onceconfident Couche-Tard on the defensive.
By the time this story appears, Casey’s shareholders will have voted on a course of action at their Sept. 23 annual meeting. Such a vote, analysts suggest, will not conclude a deal, but simply begin the process of potential exclusive negotiations—if negotiations even proceed.
As Canaccord Genuity analyst Derek Dley told The Financial Post, “We’re going to see a long, drawn-out battle.”
Indeed, amid all the uncertainties, Dley’s observation is perhaps the only thing that is certain: The battle has begun.
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