Alimentation Couche-Tard Inc.
Correction: EG, Again? Unconfirmed WSJ article indicates ATD and EG Group engaged in discussions
Our view: In a deja vu from last September 10, WSJ reporting EG and ATD exchanging proposals about a potential combination with unconfirmed report of valuation ~US$16B for EG Group and possibly Asda, $1B higher than last September. As we noted in September, a potential combination of ATD and EG Group would likely be highly strategic and compelling, but we reiterate ATD's DNA is to remain highly disciplined around value regardless of strategic attractiveness. With or without potential M&A, we reiterate our constructive view on ATD.
Key points:
This version of the note replaces an earlier note with updated information regarding EG Group profitability.
A compelling potential transaction: The EG Group portfolio was largely built on M&A (Exhibit 1) across multiple geographies and of varying asset quality. Presumably ATD was part of several of the processes, but was ultimately either outbid or chose to walk away due to myriad factors, notably valuation and post- transaction value creation opportunities. We note that it is unclear at this time whether the Asda investments would be part of the transaction.
Sufficient balance sheet capacity to do deal of this magnitude, but would necessitate suspension of NCIB, transaction could include a tranche of equity: Updated financial information from EG points to EBITDAR ~$1.5 B in 2021, funded by leverage 5.9x. As depicted in Exhibit 3, @$16B, implied multiple would be about 10.5x EBITDA (pre-synergies), consistent with the CST Transaction (exhibit 4) and would take leverage to 3.3-3.4x, or just below ATD historical peak leverage of 3.6x post-SFR in 2012, and expand EBITDA by ~30%. Given uncertainty over sustainable fuel margins levels as re-opening occurs, ATD could choose to do a tranche of equity, which could also potentially be the catalyst for a simultaneous US listing. As at FQ3, ATD leverage stood at 1.33x.
Expanding the Circle: A potential acquisition of EG Group would be consistent with ATD’s 5-year plan to double the size of the company through a combination of organic growth and M&A. ATD has always been highly disciplined on M&A valuation (Exhibit 4) and we would expect management to apply even more heightened financial oversight in the current environment, and for large-scale transactions. Valuation/price paid would ultimately be subject to the quality of the assets, potential for post- transaction value creation, including any underlying real estate. We point out that ATD could include partners to satisfy competition issues, notably in the US where ATD+EG would imply almost 11k locations (Exhibit 2). We also remind investors that ATD typically looks for 35-50% EBITDA accretion from cost synergies/more efficient operations, which raises the question of how much can be surfaced in sourcing, distribution, supply chain, and at store level once the EG corporate infrastructure is eliminated.