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Is 7-Eleven In or Out on a CST Acquisition?

Seven & i coy about larger Corner Store deal; analysts weigh in

TOKYO -- While speculation still includes 7-Eleven Inc. parent Seven & i Holdings Co. Ltd. as a possible acquirer for convenience-store retailer CST Brands Inc., which reportedly has begun taking bids, Seven & i said it isn’t interested in acquiring all of CST Brands, according to Bloomberg.

Last week, reports surfaced that Laval, Quebec-based Alimentation Couche-Tard Inc. and Seven & i had submitted offers to acquire CST Brands Inc., people familiar with the matter told Reuters.

Other bidders include private-equity firms Blackstone Group LP and Apollo Global Management LLC, the sources said.

CST Brands will seek at least one more round of offers before deciding on whether it will sell, said the report.

Tokyo-based Seven & i already has purchased a piece of CST Brands.

But Seven & i spokesperson Minoru Matsumoto told the news agency that while it is buying 79 convenience stores in California and Wyoming from CST Brands for $408 million, it won’t bid for the rest of the company. CST Brands announced that deal with Seven & i subsidiary SEI Fuel Services Inc. in early May.

Irving, Texas-based 7-Eleven Inc. has been increasing its merchandise capabilities and expanding its store network in North America, Seven & i said in a separate announcement on June 3 confirming the West Coast deal. “This agreement is intended to contribute to higher revenues and profits from convenience-store operations in the region. Through this acquisition, 7-Eleven Inc. aims to further expand the store network and improve convenience in California, where it has existing stores,” the release said.

“This asset purchase is expected to contribute to profits over the medium to long term,” said Seven & i.

Based on interviews with analysts, investors and retailers—all of whom have spoken on condition of anonymity—CSP vice president and group editor Mitch Morrison laid odds on who is likely to acquire the approximately 2,000-site CST Brands retail network.

He puts the chances at 2-1 for Couche-Tard.

  • Click here for Morrison's full analysis and his take on 7-Eleven and other bidders.

Other analysts have begun to weigh in on a CST Brands sale.

“We have long believed that CST would consider an outright sale of its business in the course of its strategic review process,” Bonnie Herzog, managing director, beverage, tobacco and convenience-store research for Wells Fargo Securities LLC, New York, said in a research note. “We continue to believe an outright sale of CST's business is the most likely outcome in the company's strategic review process and given there could be several suitors, we expect a bidding war could ensue.”

She continued, “We believe CST is a strategic asset that would be attractive to Couche-Tard, Seven & i, and potentially others. A key opportunity for a potential buyer would be to improve CST's merchandise performance both in [same-store sales] and margins, which could be accomplished by a best-in-class acquirer to drive operational improvements and synergies. We continue to believe CST is trading well below its fair value.”

Michael Van Aelst, managing director of research for TD Securities Inc., Montreal, wrote in a research note, "We view CST’s corporate stores in the U.S. as a very good fit for Couche-Tard. About 55% of these are in Texas—a market where Couche-Tard has struggled to gain significant scale given that it is in 7-Eleven’s backyard—while much of the remainder would be easily tucked into Couche-Tard’s existing business units. The sites in Canada may be less attractive, in part because Couche-Tard would likely face some Competition Bureau issues in Quebec."

He said he believes Couche-Tard could find enough synergies to justify paying 11x to 12x.

"Even though CST may be among the last few remaining large U.S. networks left for Couche-Tard to acquire in the U.S., we would be surprised to see Couche-Tard stray too far from its historical discipline related to minimum return requirements," he said. "Despite a price tag potentially reaching $5 billion, we do not believe that Couche-Tard would require equity financing unless it wants to reload the balance sheet for another material deal sooner than free cash flow would permit."

And Ken Shriber, managing director, Petroleum Equity Group Ltd., Chappaqua, N.Y., told CSP Daily News, “It is not surprising that CST has followed a dual path of courting potential buyers while their newly formed committee examines their business for operating-expense cuts and margin improvements and explores potential strategic opportunities to significantly grow the business. At the end of the day, should the deal be made at a high enough multiple above 10x, the best alternative for its shareholders may indeed be to sell to a much larger competitor like 7-Eleven, Circle K or ETP/Sunoco.”

CST Brands is one of the largest independent retailers of motor fuels and convenience-store merchandise in North America. It has more than 2,000 locations throughout the southwest United States, Georgia, Florida, New York and eastern Canada. CST also owns the general partner of CrossAmerica Partners LP, a master limited partnership (MLP) and wholesale distributor of fuels, based in Allentown, Pa


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