Will Couche-Tard Make Play for Hess?

Following WilcoHess deal, terminal offer, analyst sees retail giant as "logical" buyer

MONTREAL -- North American convenience retailer Alimentation Couche-Tard Inc. could be contemplating a play for the retail assets of Hess Corp., according to a research note issued by Michael Van Aelst, managing director of research for TD Securities Inc., Montreal.

Couche-Tard's shares were up 4% yesterday, and he said, "We believe that this could be due in part to speculation that the sale of Hess' substantial retail assets is nearing and that Couche-Tard would be a logical buyer."

Last week, Woodbridge, N.J.-based Hess announced that it has agreed to acquire the remaining 56% interest in Winston-Salem, N.C.-based convenience store and travel plaza operator WilcoHess LLC that it did not already hold. WilcoHess operates about 350 c-stores and nearly 40 travel plazas in Alabama, Florida, Georgia, North Carolina, Pennsylvania, South Carolina, Tennessee, Virginia.

Hess said, however, that it is still moving forward with its retail network selloff. It bought out WilcoHess to allow it to "continue its divestiture of the downstream business in a way that maximizes value for shareholders," a Hess spokesperson told CSP Daily News. It ties up the Hess retail offering in a neater package more attractive to a buyer, he said.

Van Aelst cited an Oil Price Information Service (OPIS) report that a package listing all Hess fuel terminals had already been distributed to potential buyers and that there were suggestions that the retail network "package" would not be far behind.

"We would see this development as a positive as it would represent confirmation that the company's intention is to sell, rather than spin off, the company's 1,350 retail locations. It remains unclear whether the network will be sold to one buyer or split into regional packages to increase the number of potential bidders. Couche-Tard would be the most logical buyer of the entire network, in our opinion, and we believe that the market be starting to price at least modest odds of a deal into the share price."

Couche-Tard, which owns the multi-regional Circle K chain in the United States, tried unsuccessfully to buy major Midwestern retailer Ankeny, Iowa-based Casey's General Stores Inc. in 2010.

On its most recent conference call, Couche-Tard management indicated it "could handle additional [acquisition] opportunities and could already be active on additional opportunities," said Aelst. It also suggested that it had the capacity to spend $1.5 billion on acquisitions, and "at 7.0x EBITDA, we estimate that Hess' retail business would be worth about that much."

He added, "From a geographic standpoint, there would a good fit between the two companies, as Hess' stores in the Northeast would fill in gaps in Couche-Tard's network, and Hess' stores in the Southeast would add to Couche-Tard's density."

Woodbridge, N.J.-based Hess is a leading global independent energy company primarily engaged in the exploration and production of crude oil and natural gas and the marketing of refined petroleum products, natural gas and electricity. Hess is a major independent gasoline-convenience store retailers on the East Coast with more than 1,350 retail outlets in 16 East Coast states.

Laval, Quebec-based Couche-Tard's network currently includes approximately 6,200 c-stores throughout North America, including approximately 4,500 stores with fuel. It has agreements for the supply of motor fuel to more than 350 sites operated by independent operators. Its North-American network consists of 13 business units, including nine in the United States covering 40 states and the District of Columbia (under the Circle K banner) and four in Canada covering all 10 provinces (under the Couche-Tard and Mac's banners).