Sometimes patience pays off.
Frequently frustrated while competing in an M&A climate in which multiples defy conventional wisdom, Alimentation Couche-Tard, long considered a lion of acquisition in the c-store industry, stubbornly held true to its disciplined disposition.
Yes, the Laval, Quebec-based operator did bid up in its hostile takeover pursuit of Casey’s General Stores more than four years ago. And yes, it submitted a healthy proposal for Hess’ retail network and Nice N Easy Grocery Shoppes just last year.
But long accustomed to returning from battle with a prize, Couche-Tard often found itself outbid by competitors for many of the industry’s most-coveted operators.
So Couche-Tard’s $1.7 billion acquisition of the 1,512-unit, Cary, N.C.-based chain The Pantry was, if nothing else, a resounding wakeup call to the industry that the proprietor of the robust Circle K network has shaken off any notion that its glory days are in the past.
And yet, despite what some are calling the “Coup for Roo” as Couche-Tard assumes control of The Pantry’s vast Kangaroo retail network, many are questioning the purchase.
Specifically:
- Did Couche-Tard overpay for a company steeped in debt and with a network deep in sale-leaseback arrangements and little real-estate holdings?
- How will Couche-Tard handle overlapping markets and a portfolio fraught with hundreds of tired, outdated stores?
- Will adding the largest chain in the Southeast truly increase Couche-Tard’s competitive edge?
Conversely, some have praised the deal, pointing to important upgrades The Pantry had undertaken in recent years to streamline point-of-sale (POS) systems, enhance its food and beverage offering, trim debt and upgrade store imaging.
These supporters acknowledge that Couche-Tard will have its share of work to do to right what has been a listing Pantry vessel. But they also say that unlike the recent private-equity investors who have captured headlines in the c-store space in recent years, Couche-Tard has the necessary structure to make this acquisition work.
“This deal needed a thoughtful, disciplined approach, and Couche-Tard is well experienced in this area,” says Dennis Ruben, executive managing director of NRC Realty & Capital Advisors LLC, Scottsdale, Ariz. “They grew in the U.S., knowing how to take chains out of bankruptcy like the Dairy Mart deal, and how to take chains out of financial distress.
“They’ll have their work cut out [for them], but the folks leading Couche-Tard are really smart guys, good operators, and will be deliberate in assessing which stores are worth keeping and which ones are not.”
CONTINUED: What did Couche-Tard get itself into?
Competitive Watch
Of the roughly dozen operators, analysts and industry experts interviewed for this story, most spoke on condition of anonymity and several others declined comment.
That said, consensus emerges on challenges and opportunities for Couche-Tard:
- Couche-Tard was famished for a deal, and it possibly overpaid based on a blended multiple estimated at 7x EBITDA.
- It will likely look to renegotiate the heavy load of leasehold properties with an eye toward shedding 200 to 500 stores, while optimizing the remaining network anchored in Florida, Georgia and the Carolinas.
- Couche-Tard operates 6,300 stores in North America via a decentralized structure of 13 semi-sovereign business units, including nine across the United States. Sources believe Couche-Tard will most likely tuck The Pantry’s portfolio into two existing units, although one industry observer speculated that the operator could either have corporate oversight of The Pantry’s network or potentially create a temporary regional bureau while it determines which locations and markets to hold and to shed.
- Some sources believe Couche-Tard will use The Pantry as a platform to grow in the still-fragmented Southeast, pursuing increased market share in populous districts.
- Most believe Couche-Tard will likely convert the Kangaroo stores to Circle K and its proprietary offer rather than continue The Pantry’s recent preference to integrate quick-service restaurants (QSRs) into its retail model.
“You have to assume at least in the near short term Kangaroo will go bye-bye—Couche-Tard won’t get leverage out of the brand,” says Jim Fisher, CEO of Houston-based site-analysis firm IMST Corp. “Couche-Tard will get benefits from the number of units, and certainly inside sales.”
While Couche-Tard did not reply to requests for comment as of press time, president and CEO Brian Hannasch said at a December press conference that the company had not yet made any decisions regarding branding. “But we believe there is an opportunity to invest and improve,” and execs would spend the coming months mapping out integration plans, said Hannasch.
Standing on the sidelines, one may wonder what Couche-Tard has gotten itself into.
Circle K is a quality chain with a conventional offering. Its foodservice program is solid, its merchandising is considered slightly above average and its fuel prices are competitive, though not market-setting.
Yet the South is where the convenience channel is enjoying a renaissance. Chains such as Wawa, Thorntons and, most recently, Speedway are primed to accelerate growth in Florida, which recently moved ahead of New York as the country’s third most populous state. Sheetz, RaceTrac and QuikTrip are ratcheting up their investments in the Carolinas, rolling out new and larger store formats, dramatically enhancing foodservice programs and architecture.
In other words, Circle K may be growing bigger in portfolio, but is it prepared to make the necessary investments to meet what is the most challenging and dynamic convenience market in the United States (Texas notwithstanding)?
More Than Numbers
In raw numbers, Couche-Tard will seize greater market share.
Take Florida. According to figures from Wall, N.J.-based Oil Price Information Service (OPIS), Circle K in that state operated more than 440 stores and generated 9.3% fuel market share for the 30-day period ending Dec. 1, behind only 7-Eleven. The Pantry’s Kangaroo chain, thanks to the company’s 1990s acquisition of Lil’ Champ, ran 365 stores with 5% gasoline share in the same period. While simple arithmetic suggests Couche-Tard could soon wield 14% share in the Sunshine State, a deeper look shows an interesting story.
For one, there are market overlaps and gaps. (See chart, p. xx.) In Jacksonville, Kangaroo is the No. 2 chain in market share behind only Gate Petroleum, and the No. 1 in terms of store count with 111, OPIS reports. Such market penetration represents an opportunity for Circle K, whose primary markets are in south Florida, including Orlando and Tampa/St. Petersburg.
So while Circle K and Kangaroo have strong operations in Florida, each operates in different playgrounds within the state. Look at other markets, notably the hotbed of North and South Carolina, and the picture blurs: Overlaps are clearly marked and the competitive landscape is fierce.
“Circle K is arguably a better operator than The Pantry,” says one Southern operator, on condition of anonymity, who has competed with both. “The Pantry are not bad operators from a customer perspective, but they had different financial circumstances and had a lot of turnover, from what I could see.
“Circle K is a solid operator,” he continues. “They don’t let their ego get in the way of making decisions. They’re not going to give anything away, but they’re not going to suck the margins out of the market, either.”
Asked if he is concerned about Couche-Tard taking over the Kangaroo network, the operator says, “From a competitive standpoint, I don’t anticipate any impact. I was more worried about Speedway buying The Pantry. … Speedway keeps you on your toes and is known to sometimes price very aggressively.”
Another operator with stores in the South, who also spoke on condition of anonymity, offers similar sentiments.
“Having Couche-Tard run them rather than The Pantry does not make much of a difference to me,” the operator says. “I prefer to compete with the large chains like 7-Eleven and Couche-Tard since they struggle to keep all stores consistent and tend to run them like a portfolio of assets rather than running each individual store like it is a sole proprietorship.”
Fisher of IMST believes the deal will not dramatically elevate the c-store landscape in the Southeast.
“Let’s put it this way: They don’t make anyone raise the level of their game,” he says. “QuikTrip and Kwik Trip make competitors raise the level of their game; Wawa and others can do that. There’s no big shadow cast by Couche-Tard or The Pantry.”
MAPCO Express Inc., the Brentwood, Tenn.-based chain owned by Delek U.S. Holdings, has competed with both chains. COO Tony Miller told CSP, “We have served customers for many years in markets where both Circle K and Pantry have done business. Based upon our experience, this acquisition will not change how we market our brand. We are very confident in our strategy and proud of the successes it has provided.”
Joe Sheetz, CEO of Altoona, Pa.-based Sheetz Inc., which in recent years has stretched its network into North Carolina, said the Couche-Tard deal would not interrupt his company’s plans.
“As far as North Carolina, our plan is to continue to build 10 to 12 new stores in that market every year,” he says. “We have 69 stores today in North Carolina. … That certainly won’t change.”
CONTINUED: Assessing 1,512 stores
Looking Ahead
Once a structure is set, Couche-Tard will undertake the strenuous process of not only assessing each of the 1,512 stores purchased but also reviewing the leases and determining a go-forward strategy.
By most accounts, The Pantry’s portfolio represents one of the most complex, varied assortments that exist within a single brand. That is largely due to The Pantry’s history and acquisition approach.
It was in the mid-1990s when The Pantry, backed by investor Freeman Spogli & Co. and led by former grocery executive Peter Sodini, galloped across the South, picking up dozens of chains, most of them moderate to midsize, family-run operations.
To keep maximum liquidity, The Pantry often bought via sale-leaseback with its eye focused more on the next deal than on the actual mechanics of running and upgrading operations. This made The Pantry very lean organizationally yet arguably emaciated in areas it needed to bolster, from technology systems to foodservice operations.
Since Sodini stepped down as CEO in fall 2009, eventual successor Terry Marks and more recently Dennis Hatchell sought to shift The Pantry from an acquisition slot machine to a stable card-player. Instead of looking for the next buy, The Pantry of recent years looked inward, paring down burdensome debt, investing in operational upgrades—most notably in foodservice—and grasping at a long-term strategy while, as a publicly traded company, confronting the eager short-term demands of institutional investors.
Marks and Hatchell also attempted to work within a leasehold structure that left the company handcuffed to unforgiving leases and reduced equity—and ultimately a sizable debt that represented nearly half of the $1.7 billion all-cash transaction.
Now it’s Couche-Tard’s challenge to undo or rework the lease structure that holds hostage about 75% of The Pantry’s assets.
“There will be a lot of horse trading,” says one industry expert familiar with both Couche-Tard and The Pantry. “Those leases generally run 20 years, with three or four 5-year extensions.
“Couche-Tard is now faced with having to review all the leases and negotiate with the leaseholders. On one hand, the leaseholder can simply tell Couche-Tard ‘You’re stuck with the leases,’ and let Couche-Tard try to sublease the stores they don’t want to new immigrants or other independents.
“On the other hand, Couche-Tard is a proven operator with strong financials,” the industry expert says. “The leaseholders may want to work with them. There could be a lot of trading where Couche-Tard ends up paying a higher lease for some properties in order to get out of the leases on the underperforming stores. It’s going to be interesting to see what ends up happening.”
Toward that end, others are wondering how Circle K will fare in competing against the likes of Gate Petroleum, Wawa and Speedway (via the recently acquired Hess assets) in Florida; and QuikTrip, RaceTrac and Sheetz in the Carolinas.
Says Fisher of IMST: “Based upon the operational level Circle K and The Pantry both have, the numbers are more important to them in creating brand loyalty than to QuikTrip, where it’s about the customer experience. It’s not the same level of customer experience with Circle K and Kangaroo/The Pantry. The brand extension is important to them; it’s a long-running brand with multiple decades of operational history.”
Industry veteran Dick Meyer of consulting firm Meyer & Associates, Mesa, Ariz., agrees that Couche-Tard may not be a QuikTrip or Sheetz. Nor is it trying to be.
“My experience with Couche-Tard goes back to the 1990s,” he says. “From the time they were purchasing Circle K from ConocoPhillips or taking Dairy Mart from the bankruptcy courts, they have always impressed me as very smart and very disciplined.
“I am sure they have already gone over or are going over each Kangaroo store and evaluating a plan for them,” he continues. “My bet is they’ll take over the best of the best and strategically find a way to cull the weaker stores. In the end, I expect them to be all right.”
Fuel Fill-In Opportunities
“Any time we have an opportunity to acquire, we would rather fill in existing opportunities,” said Couche-Tard’s Brian Hannasch after the company announced its December 2014 deal to acquire The Pantry and its 1,512 Kangaroo sites. The following charts highlight a few opportunities Couche-Tard’s Circle K has to gain fuel brand market share and expand in the vibrant Southeast.
| Fuel brand | Station count | Market share | Outlet share |
Florida | |||
| 1. 7-Eleven | 632 | 15.28% | 9.88% |
| 2. Circle K | 443 | 9.32% | 6.93% |
| 3. Shell | 536 | 9.07% | 8.38% |
| 4. RaceTrac | 162 | 8.90% | 2.53% |
| 5. Chevron | 493 | 5.35% | 7.68% |
| 6. Hess | 207 | 5.20% | 3.36% |
| 7. Kangaroo | 365 | 5.00% | 5.67% |
| 8. Mobil | 305 | 4.61% | 4.84% |
| 9. Sunoco | 503 | 4.48% | 7.74% |
| 10. BP | 364 | 4.17% | 5.75% |
North Carolina | |||
| 1. WilcoHess | 286 | 11.96% | 7.36% |
| 2. Kangaroo | 332 | 11.59% | 8.59% |
| 3. Sheetz | 67 | 8.20% | 1.73% |
| 4. BP | 325 | 7.74% | 8.51% |
| 5. Exxon | 323 | 6.54% | 8.37% |
| 6. Shell | 304 | 6.06% | 7.78% |
| 7. CITGO | 408 | 4.91% | 10.65% |
| 8. Circle K | 90 | 3.36% | 2.31% |
| 9. 7-Eleven | 79 | 3.36% | 2.02% |
| 10. Unbranded | 361 | 3.29% | 9.80% |
South Carolina | |||
| 1. Kangaroo | 258 | 12.84% | 11.32% |
| 2. QuikTrip | 35 | 8.55% | 1.47% |
| 3. Spinx | 81 | 7.97% | 3.53% |
| 4. Exxon | 188 | 7.95% | 8.35% |
| 5. Unbranded | 424 | 6.53% | 19.13% |
| 6. BP | 150 | 6.25% | 6.70% |
| 7. Circle K | 75 | 5.34% | 3.30% |
| 8. Shell | 151 | 5.24% | 6.76% |
| 9. Sunoco | 115 | 4.01% | 5.04% |
| 10. WilcoHess | 31 | 3.83% | 1.38% |
Source: OPIS
Note: November-December 2014
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