January 12, 2021
Alimentation Couche-Tard Inc.
Bonjour, Hi?: Thoughts on a potential ATD/ Carrefour transaction
Our view: ATD has repeatedly demonstrated i) a willingness to take bold steps to grow the Company, while ii) maintaining significant financial discipline and focus on building shareholder value. Presumably, therefore, ATD's approach to Carrefour was undertaken with a clear path toward both. Regrettably, however, early disclosure of these very preliminary talks could become an overhang for the stock until investors see where exactly that path will lead. Given the very preliminary nature of the discussions, all forecasts, price target and rating remain unchanged.
Key points:
Thinking outside the box (it’s not lost on us that the French word "carrefour" translates to "crossroads"): Confirmation that ATD and Carrefour are in very preliminary stages of discussions regarding a potential transaction came as surprise given the Company's focus–to date–squarely on its core c-store business. Carrefour's own "convenience" segment has been growing rapidly, with 7,729 stores at the end of Q3/20, +7.5% vs Y/E 2019 (Exhibit 6). But with retail channels increasingly blurring, store formats extending and contracting, a strategic combination leveraging supplier and consumer relationships, supply chains, omnichannel capabilities, etc, extending into an adjacent business could surface interesting value creation opportunities. In October of 2020, Asda was purchased from Walmart by the consortium behind EG Group.
A rather large bite: Assuming a 30% premium (within range of historical transactions) for the equity component, EV would be in the range of US $39B, or ~7x EBITDA. However, taking a closer look at Carrefour's balance sheet reveals close to US$6.5B in consumer credit. On an adjusted basis, we estimate EBITDA valuation for the retail business closer to 5.6x. (Exh 4)
Long track record of disciplined M&A: At our Nov 2020 fireside chat, CEO Brian Hannasch reiterated ATD's commitment to acquiring top quartile assets and teams while maintaining a sharp focus on discipline and value. And that ATD has historically appeared unwilling to pay the elevated multiples at which high profile assets like Speedway and Cumberland Farms transacted is a reflection of its commitment to financial discipline. We remind investors that ATD typically targets 30-50% EBITDA lift post- acquisition and despite its growth-by-acquisition history, it enjoys ROE of 25.7% and ROIC of 17.3%, evidence of its financial discipline.
Forecasts, outlook unchanged: Given the very preliminary nature of the discussions between ATD and Carrefour, at this time we are leaving our forecasts unchanged. Should no transaction occur, ex-M&A we forecast 7-8% EBITDA growth on a gas margin neutral basis. With excess annual FCF approximately $2B, ATD is well-positioned to return capital to shareholders via dividend growth and opportunistic share buyback. In December ATD repurchased $293 MM under the NCIB.