Couche-Tard cagey about the likelihood of 7-Eleven takeover

Globe and Mail

2 days ago

Alimentation Couche-Tard Inc. ATD-T, the Canadian convenience store giant trying to take over 7-Eleven, says it has started talks with its Japanese rival on a possible deal even as it faces a challenging U.S. retail environment that is hurting its financial results.
Couche-Tard, which is based in Laval, Que., and controls the retail banner Circle K, struck a non-disclosure agreement with 7-Eleven parent Seven & i Holdings Co. Ltd. in April, a crucial step.
On a call Thursday to discuss fourth-quarter earnings, Couche-Tard chief executive Alex Miller declined to comment on the likelihood of a deal but said he does not expect the process to drag on indefinitely.
'We are engaged' with Seven & i, Mr. Miller said. 'We've signed the NDA, we are engaged in diligence, we are engaged in management meetings, we are engaged on the divestiture. And I think the benefit of that is it's setting a timeline … And I believe that timeline will be shorter rather than longer.'
It would be a monster merger, combining the two biggest convenience store players in the United States.
The rivals have also been working together with investment bankers and lawyers on securing buyers for stores they might have to sell to satisfy competition concerns – an estimated 2,000 U.S. locations. Analysts see private equity firms as the likely buyers.
Couche-Tard said earlier this month that it was confident it had a clear path to regulatory approval, according to an update posted on a special website set up for its bid effort.
'We have received multiple indicative proposals from highly experienced and credible buyers,' the company said.
Seven & i has said Couche-Tard is playing down the antitrust risks of a potential merger and vowed it won't be drawn into limbo for years as regulators decide its fate.
The Japanese company has said its directors have always been open to a merger or go-private transaction, but only if there's a high certainty that a deal will close.
Tokyo-based Seven & i is pursuing a dual-track effort in its bid to create value for shareholders: exploring a possible sale to Couche-Tard or going it alone as a more focused business.
As part of its plans to remain independent, it is selling its underperforming supermarkets and plans to list a portion of its U.S. retail operation to fund a massive stock buyback.
Couche-Tard's current offer for Seven & i is worth about 7.4-trillion yen (US$51-billion). Company founder and chairman Alain Bouchard has dangled the possibility of sweetening that amount based on the results of due diligence.
The sheer size of the potential takeover has scared some Couche-Tard investors, who've expressed concerns about equity dilution if a big sale of shares is needed to fund the deal. The shares are down 19 per cent from their 52-week high.
At the moment, the key issue for Couche-Tard is that the company is 'not delivering growth that investors have become accustomed to, it is not repurchasing shares, and there is an equity issuance overhang,' National Bank of Canada analyst Vishal Shreedhar said in a June 4 research note. 'We anticipate these issues to resolve over the near term.'
Couche-Tard generated an adjusted profit of US$441-million, or 46 US cents per share, on revenue of US$16.3-billion for its latest quarter, just slightly off the 47 US cents per share that analysts had estimated. The company was hurt in particular by weaker demand for gasoline and in-store merchandise in the U.S., while its performance in Canada and Europe was stronger.
'The convenience store channel has lost market share against other channels, in our view, as frugal consumers seek value and look to stretch their dollars,' Stifel analyst Martin Landry said in a note.
The company's merchandise same-store sales have now declined year-over-year for seven consecutive quarters, he said.