Couche-Tard Takes On the Run

Retailer acquires 43 ExxonMobil stores, franchise agreements for 400-plus U.S. sites

Abbie Westra, Director, Editorial, CSP

LAVAL, Quebec & FAIRFAX, Va. -- Alimentation Couche-Tard Inc. announced yesterday its deal to acquire from Exxon Mobil Corp. the On the Run convenience store franchise system, as well as 43 of its company-owned and -operated stores in the Phoenix market area. As reported in yesterday's CSP Daily News Flash, Couche-Tard will take control of the franchise agreements for approximately 450 On the Run stores currently operated by ExxonMobil-branded fuel dealers and distributors, acquire the land and buildings for 33 of the Arizona locations, and assume or enter leases for [image-nocss] the remaining 10 sites.

While the Arizona stores will be converted to Circle K-branded c-stores offering Circle K-branded fuel, the franchised sites will continue to run under the On the Run banner operated by the franchisee dealers and distributors of ExxonMobil.

The purchase price is confidential between the parties, and Couche-Tard will fund the acquisition from internal available cash dollars. The transaction is expected to close in late May.

This deal doubles the number of franchise stores under Couche-Tard's umbrella, and the company is offering to approximately 25 employees from On the Run similar positions in the Circle K franchise division.

Couche-Tard's vice president and CFO Raymond Pare told CSP Daily News that the company is equally excited about both components of the deal. "Even if the franchise side on a contribution basis will be a lot smaller than the other, for our franchise group, it is a very good opportunity," he said. "Also, we will establish a very good relationship with the 450 operators of these franchises."

Most On the Run sites are in new areas for Couche-Tard, Pare continued. "It's a good opportunity for us to continue to develop some markets where we are not as big as in certain other areas," he said.

As for the company-owned sites, said Pare, it reinforces the company's strong positioning in the Southwest: "It is a very good complement, a very good quality of assets."

Kristen Hellmer, a spokesperson for Irving, Texas-based ExxonMobil, told CSP Daily News that the transaction "was carefully thought out and negotiated with a long-term interest of the franchisees in mind, and our goal was really to position the On the Run brand with an expanding franchisor." ExxonMobil's marketing operations are based in Fairfax, Va.

This latest news follows a series of movements from both companies in response to a changing convenience and petroleum landscape.

In June 2008, ExxonMobil began a large shift from direct retail to the distributor class of trade. The company announced at the time the transition of 820 company-owned and -operated stores and 1,400 dealer-operated sites. The change in direction was a response to reduced margins and growing competition in the fuels-marketing section, with hopes of building on the strength of the company's current distributor network.

"We continually assess our business operations and the opportunities for growth, restructuring and divestment depending on the fit with our overall strategic marketing objectives," Hellmer said.

The multi-year process started last year included plans to transition the majority of the sites to distributors.

Meanwhile, Laval, Quebec-based Couche-Tard has been quietly acquiring sites since the beginning of the year. As previously reported in CSP Daily News, the company purchased 20 sites in the United States and Canada and converted 45 sites in Missouri to the Circle K brand through a franchise agreement with Jump Oil Co.

During an earnings call in March, the company said that it believes it may be able to realize acquisitions by seizing opportunities arising from the economic climate and from attractive access to credit facilities.

Desjardins Securities, the securities brokerage arm of the Canadian financial group, said in a research note yesterday that it finds "the acquisition of the 43 stores as a positive that should add roughly 1% to 2% to Couche-Tard's revenues and profits. Revenues from the franchisees are not expected to be material to Couche-Tard's overall revenues."

"We are puzzled by the acquisition of a competitor's banner," the note continued, "but we look forward to obtaining more details on the company's strategy for the On the Run franchisees during the company's yearend result webcast in mid-July."

As the year progresses, Couche-Tard expects to continue acquiring more sites, and Pare cited the company's strong balance sheet and $600 million to $650 million of credit facilityessentially "cash available for acquisitions."

"We are very, very happy," said Pare of this week's deals, "and look forward to doing more than these two."

Laval, Quebec-based Couche-Tard currently has a network of 5,444 convenience stores, 3,607 of which include motor fuel dispensing, located in 11 large geographic markets, including eight in the United States covering 33 states and three in Canada covering10 provinces.

Abbie Westra, CSP/Winsight By Abbie Westra, Director, Editorial, CSP
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