LAVAL, Quebec & CARY, N.C. -- Reaction by analysts and observers to Alimentation Couche-Tard Inc.'s $1.7 billion planned acquisition of The Pantry Inc. and its Kangaroo Express convenience store chain was largely positive, with some questioning the final price tag for the highly leveraged chain.
In a media call on Thursday, execs at Couche-Tard downplayed the debt situation while highlighting the many synergies it sees with the 1,512-store chain based in Cary, N.C.
"Actually The Pantry [was] organized more financially than the operation itself," said Alain Bouchard, founder and executive chairman of Couche-Tard, Laval, Quebec. While he acknowledged that The Pantry is highly leveraged, Bouchard said its stores are in good shape. "So for us, it's a perfect fit."
Couche-Tard has more than 6,200 c-stores under the Couche-Tard, Mac's and Circle K brands in North America, as well as more than 2,200 stores in Europe.
Brian Hannasch, president and CEO of Couche-Tard, noted that acquiring The Pantry brings Couche-Tard into new markets and also provides strong fill-in opportunities in many southeastern states, such as Florida, where it has an opportunity to move to a strong No. 1 in market share with the additional sites. Other common geographies include the Carolinas, Georgia, Louisiana, Alabama and Mississippi.
"Any time we have an opportunity to acquire, we would rather fill in existing opportunities," Hannasch said.
Debating the Overlap
It's this strong overlap that had some analysts questioning the price for the deal, especially considering how conservative Couche-Tard has been in weighing previous acquisition opportunities such as the 1,200-store Hess retail network. Marathon Petroleum's Speedway chain ultimately won that bid for $2.82 billion, a price that Bouchard considered too high.
Ben Brownlow, equity research analyst for Raymond James Financial, St. Petersburg, Fla., pointed to what he considered the relatively weak equity in Pantry's Kangaroo Express brand, heavy overlap of Circle K and Kangaroo stores, and the fact that the majority of Kangaroo sites are sale-leaseback.
"I thought the valuation was a little high because you're not really buying a strong brand in the Southeast," Brownlow told CSP Daily News. "There's not a ton of underlying asset ownership--the majority of the stores are leased."
Dennis Ruben, executive managing director at NRC Realty & Capital Advisors LLC, Chicago, said adding The Pantry's assets is a good move for Couche-Tard, which has built a strong Circle K brand on the East Coast and in Florida.
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That being said, he did feel the multiple spent on the purchase was a little high because much of The Pantry's real estate is leased; however, he said he understands why Couche-Tard, which he believes has been anxious to make a major deal in the United States since losing its bid for Ankeny, Iowa-based Casey's General Stores Inc. in 2010, would be willing to pay that price.
"They're willing to pay a premium price based on the idea that they could take cost out of The Pantry overhead, and they're very good at that," he told CSP Daily News. "So operationally, this is a good move for Couche-Tard."
The Casey's effort--a prolonged attempt at a hostile takeover--would have positioned Couche-Tard as the major player in the Midwest. This deal with The Pantry does the same on the East Coast.
The timing of the deal was somewhat curious to Brownlow.
"I would have expected this a year ago," he said, noting that the fall in oil prices and lower fuel prices gave The Pantry "a pretty significant tailwind" in its fuel margins, and that the chain would have enjoyed very favorable same-store sale comparisons at the end of its current financial quarter.
"It seemed as if they were going to turn around, and would start to get traction in 2015," he said. "I wouldn't have expected for the sale now versus a year ago, nor would I expect Couche-Tard to be interested now versus a year ago, when stock was at $12 to $13."
In a research note, Keith Howlett, analyst for Desjardins Securities, Montreal, rated the deal as "positive" and said that the timing likely is due to the fact that Couche-Tard had just finished digesting its biggest acquisition to date, Norway's Statoil SA.
"As Pantry is widely held, this transaction could have been concluded at any time over the last four years," said Howlett. "As Couche-Tard has paid down most of the debt related to acquiring Statoil Fuel & Retail in June 2012, our presumption is that now is the propitious time to acquire Pantry."
And former Thorntons Oil executive Rick Claes, now senior managing director for Mesirow Single Tenant Properties LLC, told CSP Daily News, "The Pantry management team and their revamped board of directors have structured a transaction that creates a significant amount of value for their shareholders, which was long overdue. I believe that Couche-Tard was one of just a few acquisition candidates that possess both the financial wherewithal to consummate the transaction and operational prowess to integrate The Pantry's diverse portfolio of assets. ... It seems like a good deal for Couche-Tard and a great deal for The Pantry’s shareholders."
Mapping Out Integration
Couche-Tard executives have not yet decided on rebranding the Pantry's Kangaroo Express sites to Circle K. "But we believe there is an opportunity to invest and improve," said Hannasch, adding that Couche-Tard has unique offers that would drive traffic.
Brownlow expects Couche-Tard to eventually rebrand the Pantry sites to Circle K because of what he considers the lack of a "loyal customer base" for Kangaroo.
Foodservice could be an interesting area of development, considering The Pantry's quick-serve restaurant commitment to brands such as Subway. "We need to become more familiar with it in context of their operations," Hannasch said of foodservice. "We see upside for the food offer going forward."
Couche-Tard will be meeting in the next few weeks to begin mapping out its integration plans, including which offices and stores will remain open. In a press statement on the deal, Pantry president and CEO Dennis Hatchell said the merger would "provide ongoing opportunities for most of our employees," although Couche-Tard did not comment on how many of The Pantry's 15,000 employees would remain post-integration.
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