Alimentation Couche-Tard Inc.
Sun seekers (2.0)? Review-ing our thoughts around a potential ATD/Suncor transaction
Our view: In light of this morning's announcement around Suncor and Elliott Investment Management entering into an agreement which includes the formation of a new committee to oversee a strategic review of the former's downstream retail business, we are republishing our April 28 note with updated ATD financials and valuation metrics.
Key points:
Our view: As with any potential transaction of size, we would expect ATD to be part of any potential process involving Suncor (TSX: SU) retail assets, but market concentration likely precludes it from bidding for the full network. As well, the indicated valuation range of 10.5x to 14x C2023E Retail EBITDA (Elliott April presentation) raises questions around fully loaded LTM valuation, the high-end of which would conceivably be in excess of the 13.7x LTM EBITDA 7-Eleven paid for Speedway in 2021 (Ex.3).
• Elliott’s Perspective on Suncor here; Relevant slides in our Appendix. • Our colleague Greg Pardy's note (covers SU) published this morning.
Notable questions around fully loaded profitability of the retail assets.
Elliott pegged the value of Suncor retail assets at $8.5-12B or 10.5x-14x forecasted C2023E EBITDA of $857MM back in April, a figure that may exclude corporate and other costs attributable to retail. In our experience, retail assets typically trade on multiples of LTM earnings, as opposed to forecast. Our colleague Greg Pardy has an estimated EBITDA run rate of $600 MM for the retail asset, which would clearly moderate the transaction value. We also note that terms and duration of any supply contract with Suncor could have an impact on price paid.
Using the ATD/IMO transaction of 2016 as a proxy for valuation of high quality, high throughput sites in Canada implies valuation in the range of $9.5B, all else equal. At the time, ATD paid a multiple of 8-8.5x LTM EBITDA, ~$6MM per store for 279 stores concentrated in Ontario (82%) with a high proportion of owned sites (85%). By contrast, the Suncor retail assets are more broadly distributed across the country, with dealer sites making up about half the network.
ATD likely interested, but... Canada is ATD's smallest region, under 15% of GP$$. High quality networks like Petro Canada rarely transact, we would expect ATD to be very interested but apply the same financial rigor and discipline as with all transactions. With just under 300 existing stores in Western Canada, ATD would be well positioned to bid for the Western Canada network, but would likely butt up against competition bureau constraints in both Quebec and Ontario, suggesting a partner might be required (Ex.1).