Couche-Tard Faces Investor Grilling as Carrefour Deal Fails

(Bloomberg) -- Executives at Alimentation Couche-Tard Inc. stumbled into the quagmire of French politics with an attempt to take over Carrefour SA. On Monday, they’ll have to explain what they were thinking.

The companies announced the end of negotiations on Saturday, four days after Bloomberg first reported the talks, following a sharp rejection from the French government. The two sides said they’ll work instead on a looser alliance in areas including fuel purchasing and product distribution. Couche-Tard has planned a conference call for analysts and investors at 8 a.m. New York time.

The takeover attempt suggests the Canadian firm is ready to broaden its scope of business as it pursues a five-year plan to double earnings by 2023. Until now, it has focused on convenience stores and gas stations, with 14,200 locations from Louisiana to Ireland.

Monday’s call is a chance to outline its Carrefour rationale to investors who recoiled at the prospect of a $20 billion deal that would have thrust the company into managing giant supermarkets.

The end of talks “is likely to cause a collective sigh of relief among investors, who were perplexed from a strategic perspective, and highly apprehensive with respect to executional risk,” RBC Capital Markets analyst Irene Nattel wrote in a note to investors. Couche-Tard fell almost 11% last week, bringing its valuation close to levels seen during last year’s market crash.

The Laval, Quebec-based company has been making headway on its growth plans even without a major acquisition in recent years. Analysts expect adjusted earnings per share to be 16% higher for the fiscal year that ends in April, according to data compiled by Bloomberg.

The chain has been improving its coffee and adding fresh food offerings, which come with higher margins. It’s digging into analytics to improve pricing and promotions, and planning to roll out electric vehicle charging stations in North America after learning from its experience in Norway.

Couche-Tard strengthened its foothold in Asia by buying about 370 stores in Hong Kong and Macau that previously were Circle K brand licensees. But a large takeover has remained elusive since it signed a $4 billion purchase of Texas-based CST Brands Inc. in 2016.

In April, the company walked away from a $5.6 billion proposal for gas station chain Caltex Australia Ltd. (now known as Ampol Ltd.), citing pandemic uncertainty. And it missed out on Marathon Petroleum Corp.’s Speedway gas stations, which were scooped up in August by Japan’s Seven & i Holdings Co., the world’s largest convenience store operator, for $21 billion.

Balance Sheet

Couche-Tard executives have scoffed at the valuation of Speedway. Addressing shareholders at the company’s annual meeting in September, Executive Chairman Alain Bouchard cited it as an example of the company’s discipline around acquisitions.

The balance sheet leaves it in a good place to hunt for deals. The company had about $5.5 billion in net debt at the end of its October quarter, according to data compiled by Bloomberg. It’s earned $3.5 billion in operating profit in the last four quarters.

Chief Financial Officer Claude Tessier told analysts in November that the current debt ratio is at half of Couche-Tard’s comfort level.

Yet the move on Carrefour has left investors wondering whether Couche-Tard is out of acquisition ideas in convenience stores. The transaction hit the rocks when French Finance Minister Bruno Le Maire came out against it, citing concerns about food sovereignty. A takeover of Carrefour would be politically sensitive because it’s France’s largest private-sector employer; President Emmanuel Macron faces an election in 2022.

“Rightly or wrongly, the most obvious read-through from the interest in Carrefour is that the M&A pipeline in the c-store industry is not compelling,” Mark Petrie, a Toronto-based analyst at Canadian Imperial Bank of Commerce told clients in a Jan. 14 note. The company will “have to work to repair investor trust.”

(Adds additional context on French politics and deal rejection in penultimate paragraph)