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Was Couche-Tard’s CST Offer Enough?

SAN ANTONIO — With a price tag of more than $4.4 billion representing $48.53 per share, Alimentation Couche-Tard Inc.’s deal to acquire CST Brands Inc. was one of the most anticipated sales in the convenience-store industry in recent years. How do industry analysts view the company’s biggest transaction ever?

San Antonio-based CST Brands has more than 2,000 locations throughout the Southwest United States in Texas, Georgia, the U.S. Southeast and New York under the Corner Stores, Nice N Easy Grocery Shoppes and Flash Foods brands and in eastern Canada under the Dépanneur du Coin and Corner Stores brands. It also controls the general partner of Allentown, Pa.-based CrossAmerica Partners LP, a master limited partnership (MLP) that distributes motor fuel to more than 1,100 U.S. locations.

To head off antitrust issues, Laval, Quebec-based Couche-Tard also has entered into an agreement with Parkland Fuel Corp., Red Deer, Alberta, for approximately $750 million (U.S.) to sell some of CST’s retail and other assets in Canada.

The $48.53 falls short of what many analysts have targeted as an appropriate valuation, said a Bloomberg report. Wells Fargo had said any offer would at least be above $50 a share, with the potential for bids as high as $56. When activist investor Engine Capital first started publicly pushing for a sale in December, it estimated a share price of between $50 and $55 based on the multiples paid in recent c-store industry transactions.

Shareholders Share Their Thoughts

Shareholders contacted by CSP Daily News were somewhere between sober and sanguine over the sale and acquisition of a company they thought just 15 months ago had so much promise to flourish as a leading mergers-and-acquisitions company in the fragmented convenience-store landscape.

“Am I happy with final price?” one shareholder asked. “It’s an okay deal. Couche-Tard was obviously the highest bidder and it was an all-cash deal, so there’s no real risk to shareholders. … Basically, the shareholders get to move on. Had CST started this process when things were rocking and rolling in the MLP land, the value would have been much higher. But based on where we were five or six months ago, I think this an acceptable deal for shareholders.”

Another shareholder who had hoped a sale would yield at least $50 per share expressed satisfaction, noting that CST was compromised by excessive overhead amounting to between 40% and 50% of the company’s EBITDA.

“Overall, we’re happy,” said the shareholder. “My read is that the synergy numbers they came up with were massive—$150 million to $200 million. There’s obviously a lot of G&A [general and administrative expenses]. We thought about $50 as the sweet spot. This is close enough from our view.”

Couche-Tard is a logical buyer, and it also was probably the only one in a position to pull off a deal, Bloomberg said. Other gas-station owners such as Sunoco and Marathon Petroleum were likely turned off by CST’s fuel-supply agreements with its former parent company, Valero, said the report. Those contracts extend through 2028 and would have limited the synergies either company could tap into by linking CST up with their own refining operations. As such, getting top dollar was going to be a “long shot,” according to the news agency.

CST shareholders still are making out pretty well in this deal, it said. CST shares had run up about 40% in anticipation of a deal. Couche-Tard is topping the stock’s highest stand-alone price since its 2013 spinoff from Valero and paying a 26% premium to analysts’ average price target before the sale speculation picked up in the spring. “It’s a decently excellent deal for CST shareholders,” said the report.

Analysts Weigh In

In a research note, Wells Fargo Securities Inc. analyst Bonnie Herzog said, “We believe this deal represents a solid deal for CST shareholders.”

The deal multiple represents 10.4x the last 12 months’ adjusted EBITDA, “which we believe is fair and reasonable, albeit at the low end of our expected range,” she wrote. “We believe the combined entity will be stronger than the two independent companies and offers operational improvement opportunities for CST’s store network that would not likely have been achieved as an independent company. As a successful industry consolidator, we see minimal risk to the Couche-Tard acquisition closing in a timely fashion.”

It “looks like a fair deal,” said another analyst, who asked not to be named. And Couche-Tard “was able to maintain its historical discipline, even though it paid a slight premium in order to add significant scale in a strategic footprint.”

“The deal fairly values CST at 10x our 2017 EBITDA projection,” said Raymond James analyst Benjamin Brownlow, in a research note. Along with the pre-emptive sale of assets to Parkland Fuel ahead of any Canadian Competition Bureau concerns, “We don’t anticipate regulatory issues in the U.S. given the size and fragmented nature of the convenience retail industry,” he said.

GMP Securities LP analyst Mike Landry said, “We view the acquisition of CST Brands positively [because] the accretion of the transaction is high, potentially reaching in excess of 60 cents per share once operational and tax synergies are included, an accretion rate potentially exceeding 28%; the geographic fit appears complementary given CST’s high store density in Texas where Couche-Tard is not dominant; while valuation appears rich at [approximately] 11x trailing EBITDA, it looks more reasonable once synergies are factored into the calculation; and integration risks appear low as Couche-Tard already has a strong operating platform in the U.S.”

He continued, “Couche-Tard appears to have executed another highly accretive transaction. While the synergies expectations are high, potentially boosting CST’s EBITDA in excess of 45%, we are reassured by Couche-Tard’s strong track record of achieving its targeted synergy goals in previous acquisitions.”

Couche-Tard acquired Cary, N.C.-based The Pantry Inc. and it’s Kangaroo Express c-store chain in 2015. “With CST being a spinoff from [Valero] in 2013, we see the Circle K transaction (where EBITDA doubled within approximately three years given the highly inefficient operating structure prior to acquisition) as a better comparable than the recent Pantry deal,” TD Securities Inc. analyst Michael Van Aelst said in a research note. “We see structural inefficiencies at CST providing upside to the $150 million to $200 million synergy target over three years.”

Of CST’s approximately 1,150 U.S. stores, about 55% are in Texas, “a market where Couche-Tard has struggled to gain significant scale,” said Van Aelst. “Most of the remainder should be easily tucked into Couche-Tard’s existing business units.”

Other Bidders?

Analysts do not expect other bidders to materialize.

“The risk that the transaction does not close appears low given that CST’s shares closed below Couche-Tard’s offer price, which would suggest that investors are not anticipating another bidder or an increased offer,” said Landry.

Either party may terminate the deal under certain circumstances, however, according to U.S. Securities and Exchange Commission (SEC) filings.

Couche-Tard may terminate the merger agreement if CST’s board of directors changes its recommendation, CST’s board fails to reaffirm its recommendation in favor of the merger within 10 business days after public disclosure of any alternative acquisition proposal or CST materially breaches its non-solicitation obligations under the merger agreement. CST may terminate the merger agreement in certain circumstances to enter into a superior proposal. Upon termination of the deal, CST would be required to pay Couche-Tard a breakup fee of $133 million. Either party may also terminate the merger agreement if the deal is not completed by May 22, 2017, or by Aug. 22, 2017, if all conditions are satisfied other than receipt of antitrust clearances.

Author(s): 
Greg Lindenberg
Mitch Morrison

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