SAN ANTONIO -- Alain Bouchard is about to realize his dream.
Bouchard, co-founder of Laval, Quebec-based Alimentation Couche-Tard, has long envisioned building a convenience chain that would be the largest not only in Canada, but also North America.
Before Couche-Tard's acquisition of the 1,663-unit Circle K convenience-store network for $803.8 million in December 2003, many dismissed Bouchard’s aspiration as hyperbolic fluff, as pure fantasy.
But in a matter of days, Bouchard’s dream may finally come true.
According to The Wall Street Journal, Couche-Tard is favored to acquire the coveted CST Brands Inc., as reported in a McLane/CSP Daily News Flash. The San Antonio retail chain is a spinoff of Valero Energy that has performed adequately but failed to meet shareholder expectations. The news pushed CST Brands stock to an all-time high yesterday above $48 per share.
The seemingly imminent deal comes less than two weeks after CST Brands CEO Kim Lubel declined during the company’s second-quarter earnings call to provide a detailed update of CST’s progress in finding a suitable buyer for its retail chain, including the Corner Store brand.
Odds on Couche-Tard?
It has been more than five months since CST Brands executives announced plans to explore strategic alternatives for maximizing shareholder value, spurring a queue of potential suitors from traditional convenience operators Couche-Tard and 7-Eleven Inc. to energy powerhouse Marathon Oil and private-equity firms Blackstone Group LP and Apollo Global Management LLC.
“Couche-Tard is certainly a logical party to win,” said an investor who, like other shareholders, analysts and retailers, agreed to speak to CSP Daily News on condition of anonymity because the deal has not been confirmed.
“It’s still a question about whether this would include CrossAmerica Partners, [a CST asset],” the source said. “Our view was that it would be pretty obvious if Marathon were the buyer since they could fold in CrossAmerica. If it’s Couche-Tard, that would be difficult.”
Is this a done deal, or could another player swoop in? And how much will CST Brands fetch?
The anonymous shareholder is confident that Couche-Tard, with its impressive funding facility, will be the ultimate winner, but he cautioned not to completely discount 7-Eleven.
“This is their backyard," he said. "This was definitely one of the reasons why, despite what they had said about not being interested, that we still thought 7-Eleven was in play.”
An investment specialist agreed, sounding incredulous that 7-Eleven would not be more aggressive in protecting its home state of Texas, a major market for CST Brands’ Corner Stores: “I look at the G&A, and both Couche-Tard and 7-Eleven are in a position to take out as much as $178 million based on $128 million in G&A and another $50 million in better supply deals.”
As for the purchase price, several sources interviewed believe the final figure will sit between $4.3 billion and $4.6 billion, yielding roughly a 10x to 10.5x pre-synergy multiple, that is, before similar services are consolidated.
“I think that would be a great outcome for the shareholders and a good deal for Couche-Tard,” the investment specialist said, pointing out that the post-synergy multiple would likely rest around a 8.5x multiple and potentially even lower.
What about CrossAmerica?
And what becomes of CST Brands’ partner CrossAmerica?
The former Lehigh Gas Partners undertook an IPO as a master limited partnership (MLP) in 2012. Two years later, its general partner Lehigh Gas GP was acquired by CST Brands, prompting an initial spike in its unit price as eager investors anticipated superior yields between the two entities.
Over the past year, however, the unit price of the renamed CrossAmerica Partners has sold below its pre-acquisition price despite distributing more than 1 billion gallons of fuel annually to about 1,200 fueling sites.
Several sources believe that one sticking point in Couche-Tard consummating a deal with CST Brands is how to handle CrossAmerica. Among the theories:
- Couche-Tard will make an all-cash deal for CST Brands’s stock, while selling back the CrossAmerica Partners stock to CST shareholders at less than $2 per share.
- Another view also has Couche-Tard acquiring CrossAmerica but then flipping it to a third party, potentially Marathon or a private-equity company eager to tap the potential tax-savings in an MLP. “My thinking,” said one investor, “is Couche-Tard will probably buy it (CrossAmerica) and flip it. The IDRs (incentive distribution rights) are definitely worth it. End of the day, it’s worth something to somebody. CAPL is delivering a growing distribution yield, … and they have very good management.” [Earlier this year, CAPL said its goal is to grow distribution in 2016 by 5% to 7% over 2015.]
- A third possibility has Couche-Tard acquiring all c-store assets, including CST Brands’ recent purchases Nice N Easy in New York and Flash Foods in Georgia, but not purchasing CrossAmerica.
“As best as I can see, CrossAmerica doesn’t make a lot of sense for a Couche-Tard or 7-Eleven,” one source told CSP Daily News.
If it can close the deal on CST Brands’ retail network of about 2,000 locations across the United States and eastern Canada, Couche-Tard will knock 7-Eleven from the pedestal as the largest chain in the United States and Canada.
Based on unofficial counts, Couche-Tard would then possess holdings of about 9,900 c-stores in the two countries, eclipsing 7-Eleven’s network of 8,000 stores in the United States and 600 in Canada.
It would further cement Couche-Tard as the quintessential M&A company in the industry, from its early run of major deals that included Circle K and Dairy Mart to its latest splurge involving The Pantry and now, potentially, CST Brands.
Based on precedent, Couche-Tard would readily begin transitioning CST’s Corner Store locations, including its recent large-format ground-ups, to the Circle K brand and shift the in-store product assortment to align with Circle K’s most recent programs.
For retailers in upstate New York and in the Southeast, Couche-Tard’s acquisition of CST Brands could mean the attraction of a disciplined operator known for leveraging scale and ubiquity.
“I think it will be interesting to see how they assimilate CST Brands,” said one retailer who competes in the Southeast and who spoke on condition of anonymity. “To take on The Pantry and potentially CST Brands is a lot. That said, Circle K is a better competitor. … They’re capable operators who we respect.
“It will be interesting to see what happens in the end.”