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Couche-Tard raids The Pantry with $860-million acquisition

A man passes by a Couche-Tard convenience store in Montreal in 2012.

Graham Hughes/The Canadian Press

Alimentation Couche-Tard Inc. is gobbling up more territory in the American South with a roughly $860-million (U.S.) deal for U.S. convenience store chain The Pantry Inc. as it tries to double its retail footprint over the next nine years.

Canada's biggest operator of corner stores and service stations said Thursday it has struck an agreement to buy Cary, N.C.-based Pantry, owner of the Kangaroo Express banner. Couche said it will pay $36.75 a share in cash for Pantry and its 1,500 stores, a 27-per-cent premium to Pantry's closing share price Tuesday. Including debt, the deal is valued at $1.7-billion.

"This is pretty big," said Greg Dean, principal and portfolio manager with Cambridge Global Asset Management, which owns Couche-Tard shares. "[Deals like this], they're tough to do, even one this size."

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Even as its growing scale brings more potential deals its way, Couche-Tard finds itself in tougher competition for U.S. assets now with entities such as master limited partnership structures, which are shielded from corporate taxes, Mr. Dean said. One such rival is Dallas-based Energy Transfer Partners LP, which bought gas-station owner Susser Holdings Corp. for $1.8-billion earlier this year in a bid to expand its retail business.

Lower crude prices may also slow a move by oil producers such as Royal Dutch Shell PLC and Exxon Mobil to divest their retail assets, making potential acquisition targets scarcer, Mr. Dean said. History shows fewer deals have taken place when upstream operations became challenging, he said.

The market had been anticipating another significant acquisition for Couche-Tard after its successful integration of Statoil Fuel & Retail, which it bought in 2012 for about $2.8-billion. The company sees itself as an industry consolidator.

Couche-Tard shares punched to another high, trading up 7 per cent to $45.85 (Canadian) on the Toronto Stock Exchange Thursday.

Alain Bouchard, founder of the company, handed the chief executive wheel in September to Brian Hannasch to focus on acquisition opportunities.

Mr. Bouchard has said he believes he can roughly double the company's store count to top 25,000 by 2023. It currently has about 13,100 outlets worldwide.

"As Pantry is widely held, this transaction could have been concluded at any time over the last four years," Desjardins Securities analyst Keith Howlett said in a note. "Now is the propitious time" given Couche-Tard has paid down most of the debt related to the Statoil deal, he said.

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In Pantry, Couche-Tard is getting a company with an established brand in a concentrated geography across the Southeastern United States. Pantry owns the real estate for about a third of its stores.

The company has nevertheless struggled, posting losses in three of the last five years. It is also highly leveraged, with its debt service cost and finance lease obligations pulling down income before taxes to $19.4-million (U.S.) in its fiscal year ended in September.

Mr. Howlett said he believes Couche can generate operating savings with the acquisition from things like fuel procurement. The company should also be able to lower Pantry's debt financing and its tax rate, he said.

Couche-Tard is paying an enterprise multiple of about 7.8 times trailing 12-month earnings. The boards of both companies are backing the transaction, which still requires the approval of Pantry shareholders.

Couche-Tard's key banner in the United States is Circle K. In Canada, it owns the Mac's network.

Pantry's Kangaroo Express has an active program to hire workers who are attached to the U.S. military. More than half of its 1,500 stores are located within 25 miles of a military installation and at least one-third of its employees are connected to the military as either veterans or military family members, the company's website states.

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About the Author
Quebec business correspondent

Nicolas Van Praet is Quebec correspondent for the Report on Business. He joined The Globe and Mail in 2014 after eight years at the National Post, where he covered the North American auto industry crisis and several other major stories. More


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