Is a Grocery Partnership in Couche-Tard's Future?

One analyst thinks so, citing "over-heated" acquisition atmosphere in U.S.

Greg Lindenberg, Editor, CSP

Alimantation Couche-Tard (CSP Daily News / Convenience Stores)

LAVAL, Quebec -- Noting an "over-heated" acquisition environment in the United States, an analyst anticipates that Canada's Alimentation Couche-Tard Inc. could enter into "more complicated partnership arrangements" with U.S. grocers to continue its convenience store chain growth, naming Kroger and Cerberus (Safeway) as possible partners.

"Recent transactions in the U.S. have reduced the pool of major acquisition targets in that market, and two more scale competitors for assets in the U.S. have been created," Keith Howlett, analyst with Desjardins Capital Markets, said, referencing the recent the Sunoco-Susser and Marathon-Hess transactions. He said, however, that the transaction values were "too high."

Energy Transfer Partners LP (ETP) announced in late April that it had entered into a definitive merger agreement to acquire Susser Holdings and Susser Petroleum for $1.8 billion, nearly 11x EV/EBITDA (enterprise value/earnings before interest, taxes, depreciation and amortization).

Marathon Petroleum Corp. subsidiary Speedway LLC in May announced that it would acquire Hess Retail Holdings for $2.874 billion, more than 16x EV/EBITDA.

Alain Bouchard admitted that he and other Couche-Tard executives wanted to "get their hands on" Hess' network of approximately 1,250 convenience stores on the U.S. East Coast. But the price was "too high" in Bouchard's eyes, he also said.

Howlett expects mergers and acquisitions activity to continue at this higher level. ETP/Sunoco and Marathon/Speedway "appear interested in being consolidators in regions contiguous to their core markets," said Howlett; however, "We expect Couche-Tard to remain disciplined in making acquisitions."

He continued, "With acquisition valuations at unattractive levels, more complicated partnership arrangements with, for example, U.S. supermarket groups such as Kroger or Cerberus (Safeway), may be considered. Canada, Europe and Asia may offer more opportunity in the near term. We continue to expect Shell, Chevron and Imperial Oil to divest of additional retail assets in Canada. Couche-Tard will likely compete with some or all of Parkland Fuel Corp., CST and Empire (Sobeys) for such assets."

Meanwhile, a new Market Force poll found that consumers prefer to get gas at big-box stores and supermarket chains--Kroger, Costco and Sam's Club taking the top three slots, respectively, in the latest ranking along with c-store chain QuikTrip (tied for second place). Although he does not specifically refer to that survey, Howlett asked, "Could partnership with a major grocery chain in the U.S. present a new avenue of consolidation?"

"Kroger sells more fuel per year than Couche-Tard in the U.S. market," he said. "There may be an opportunity for a credible and experienced operator such as Couche-Tard to enter into a long-term partnership arrangement to operate the fuel stations of a supermarket chain. This would include maintaining existing loyalty tie-ins between fuel and groceries. Couche-Tard has experience with partnerships, such as with Shell in the Chicago market area and with Irving Oil in the Northeast."

Couche-Tard first entered the United States with the 2001 purchase of the 225-store Bigfoot convenience store chain from Columbus, Ind.-based Johnson Oil, and then purchased the Hudson, Ohio-based, 437-store Dairy Mart chain a year later. In 2003, it purchased Tempe, Ariz.-based Circle K from ConocoPhillips, with approximately 2,300 stores. In 2010, Couche-Tard failed to acquire Ankeny, Iowa-based Casey's General Stores, with more than1,500 c-stores.

In 2012, Couche-Tard acquired Statoil Fuel & Retail, a leading Scandinavian road transport fuel retailer with approximately 2,300 c-stores in Norway, Sweden, Denmark, Poland, the Baltics (Estonia, Latvia, Lithuania) and Russia.

The company has also made many smaller acquisitions; click here to review Couche-Tard's acquisition history.

Laval, Quebec-based Couche-Tard is one of North America's largest convenience store operators with more than 6,200 locations operating under the Couche-Tard, Mac's (in Canada) and Circle K (in the United States) brands. In Europe, it operates approximately 2,275 Statoil Fuel & Retail stores across Scandinavia, Poland, the Baltics and Russia.

Part of CSP's 2014 Convenience Top 101 retailers