Couche-Tard still a bargain if The Pantry deal closes

 Alimentation Couche-Tard (TSX—ATD.B), one of our Key stocks, is acquiring The Pantry in the U.S. That company operates 1,512 convenience stores in 13 states. This transaction is large. But given Couche-Tard’s experience of successfully integrating acquisitions, we expect this transaction to pay off. The shares remain a buy for further long-term price gains and small, but rising, dividends.

Couche-Tard president and chief executive officer Brian Hannasch says, “The Pantry is an excellent company and is well positioned in the Southeastern and Gulf Coast regions of the U.S., two of the fastest-growing areas in the U.S. With this transaction we will add more than 1,500 stores to our network which will position us as the definitive leader in this region and will reinforce our position as one of the largest convenience-store operators in North America.”

The Pantry president and chief executive officer Dennis Hatchell says the transaction combines “two strong companies that complement each other extremely well.” This suggests that few of the acquired outlets will need to be closed or sold.

The Pantry is a big acquisition

Couche-Tard has agreed to pay US$36.75 a share for each of The Pantry’s 23,443,906 shares (as of June 26). This works out to an offer of nearly US$862 million. Include the debt assumed and the enterprise value is about US$1.7 billion.

That’s a large transaction. But it looks manageable for Couche-Tard. After all, its worldwide network of stores totaled more than 13,142 as of October 12. It says it will finance the transaction by using its available cash, its existing credit facilities and by taking out a new term loan.

The transaction requires the support of the shareholders of The Pantry. We expect them to approve the agreement for several reasons. First, Couche-Tard’s offer is a juicy 39 per cent above The Pantry’s 30-day average stock market price before the transaction was unveiled.

Second, Couche-Tard’s offer is in cash. This makes it more certain than compensation that includes shares and cash.

Third, The Pantry’s board of directors unanimously approved the transaction. Their support was partly based on a favorable opinion expressed by financial advisor Bank of America Merrill Lynch. Couche-Tard expects the transaction to close in the first half of 2015.

It keeps on expanding

Alimentation Couche-Tard has expanded greatly over the years. So its acquisition of The Pantry looks manageable. On October 12, Couche-Tard operated 6,303 convenience stores in all 10 Canadian provinces and 40 of the 50 U.S. states. Of this, 4,851 stores also supplied fuel for vehicles.

Couche-Tard operates 2,239 stores across Scandinavia (Norway, Sweden and Denmark), Poland, the Baltic (Estonia, Latvia and Lithuania) and Russia. Most of these stores supply fuel. While Russia is falling into a recession, most of the other countries should do well. While Norway is an oil producer, most of the money goes to an investment fund worth over $1 trillion. In Europe, Couche-Tard sells other products such as stationary energy, marine fuel, aviation fuel, lubricants and chemicals.

Couche-Tard has licensing agreements with about 4,600 stores operated under the Circle K banner in 12 countries: China, Japan, Indonesia, Malaysia, Vietnam, the Philippines, Macau, Hong Kong, Guam, the United Arab Emirates, Honduras and Mexico.

This totaled 13,142 stores. When it acquires The Pantry, Couche-Tard will add 1,512 stores to its North American network.
Couche-Tard remains a buy for further long-term share price gains as well as small but growing dividends.

The Investment Reporter, MPL Communications Inc.
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