Mergers & Acquisitions

Couche-Tard Hints at CST Deal

But what hurdles stand in its way?

LAVAL, Quebec – While it would not provide specifics, Alimentation Couche-Tard Inc. has confirmed in a statement that “it is in discussions with third parties regarding possible business transactions.” The third parties could include CST Brands Inc.

Reports indicated that Couche-Tard is the lead contender and is expected to acquire San Antonio-based CST Brands in a deal that could be valued at as much as $4.6 billion, said a McLane/CSP Daily News Flash yesterday.

No formal deal has been reached, Couche-Tard said. “There is no assurance that transactions will result from any of these discussions," the statement said. "Should agreements be reached, Couche-Tard will promptly disclose the information as required. Couche-Tard reiterates that it will maintain its disciplined approach to acquisition opportunities to create value for its shareholders.”

A transaction could be announced this week, The Wall Street Journal reported, citing an anonymous person close to the matter. However, a deal may not be reached or another of the bidders that has been vying for CST could prevail, the source said.

In March, under pressure from investors, CST launched a strategic review of assets that included a possible sale.

Given the statement from Couche-Tard, Wells Fargo Securities LLC analyst Bonnie Herzog said in a research note, “We are increasing our probability from 70% to 80% that a deal to sell CST is reached” with some party.

“The most likely scenario for a deal continues to be one acquirer (presumably Couche-Tard) purchasing CST’s entire network,” including the general partner units of CST’s master limited partnership (MLP) partner CrossAmerica Partners, she said.

“We believe there would be strong synergies in both the U.S. and Canada for a combined Couche-Tard and CST network,” she wrote. “We also believe Couche-Tard would be interesting in retaining the existing MLP partnership with [CrossAmerica] given the shift in management’s tone from December 2014, when they stated ‘We don’t have any plans to have an MLP’ to March 2016 (after CST’s strategic review process was initiated) that they ‘would certainly be open to exploring' [an MLP]."


To acquire CST, Couche-Tard may face hurdles other suitors may not, Desjardins Capital Markets analyst Keith Howlett told The Financial Post. This includes Canadian competition law relating to Couche-Tard’s market position in Atlantic Canada and Quebec.

CST’s assets include approximately 860 Ultramar locations between Ontario and Atlantic Canada.

In addition to more than 6,000 stores in the U.S., Couche-Tard operates approximately 125 Circle K locations that are co-branded with Irving Oil Ltd. in Atlantic Canada, and approximately 300 Couche-Tard stores with fuel in Quebec. It has also agreed to buy 50 Esso locations in Quebec from Imperial Oil Ltd.

As a result, if Couche-Tard were to acquire CST, Howlett believes it would probably have to sell off most of its Ultramar locations in Atlantic Canada, and potentially as many as 150 locations in Quebec.

Howlett also highlighted potential issues with a foreign entity controlling CrossAmerica Partnership LP. CST owns the general partner of the Allentown, Pa.-based MLP and wholesale fuels distributor.

In a separate research note, TD Securities analyst Michael Van Aelst said, “We view CST’s [approximately] 1,170 corporate stores in the U.S. as a very good fit for Couche-Tard. The [approximately] 870 sites in Canada may be less attractive, in part because Couche-Tard would likely face some Competition Bureau issues in Quebec. Consequently, Couche-Tard may need to sell off a portion [or] all of the Canadian business (which represents [approximately] 30% of profits) if it does acquire CST.”

Herzog said that while some investors have raised concerns about anti-trust issues in Canada, “we don’t foresee that being an issue given the combined network would still have a small minority share (approximately 10%). That said, we have long believed that a deal to sell CST could involve multiple bidders, including separate bidders for Canada and U.S. assets and potentially a separate bidder for the MLP and believe other bidders may emerge to help facilitate a deal with Couche-Tard. Regardless, we think the probability of a deal getting done is high.”

A 2013 spinoff from San Antonio-based Valero Energy Corp., CST is one of the largest independent gasoline and convenience-store retailers in North America. It has more than 2,000 locations throughout the southwestern United States, Georgia, Florida, New York and eastern Canada under the Corner Store, Nice N Easy, Flash Foods and other brands.

Laval, Quebec-based Couche-Tard’s network includes approximately 7,900 convenience stores throughout North America under the Circle K and The Pantry brands. In Europe, it operates a retail network across Scandinavia, Ireland, Poland, the Baltics and Russia. Nearly 1,500 stores are operated by independent operators in 13 other countries or regions worldwide (China, Costa Rica, Egypt, Guam, Honduras, Hong Kong, Indonesia, Macau, Malaysia, Mexico, the Philippines, the United Arab Emirates and Vietnam).

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