Why Imperial Oil Limited and Alimentation Couche-Tard Inc. Signed a Monster Deal

Imperial Oil Limited (TSX:IMO)(NYSE:IMO) and Alimentation Couche-Tard Inc. (TSX:ATD.B) are both better off.

| More on:
The Motley Fool

On Tuesday Imperial Oil Limited (TSX:IMO)(NYSE:IMO) announced that it had sold its 497 remaining company-owned gasoline stations for $2.8 billion. Most of the sites were picked up by Alimentation Couche-Tard Inc. (TSX:ATD.B) with four other buyers participating as well. The move comes more than a year after Imperial first announced its intentions to sell the stations.

So what does this sale mean for Imperial, and what does it mean for Couche-Tard?

Imperial: building up strength

Ever since oil prices plummeted in late 2014, Imperial has been cited as a potential consolidator in Canada’s energy patch. For example, some analysts thought that Imperial would offer a rival bid for Canadian Oil Sands Ltd.

There was good reason for such speculation. The company has one of the best balance sheets in the industry with a debt-to-capital ratio of just 27%. Furthermore, asset prices (including Canadian Oil Sands) have plummeted, which means there could be some bargains available. Finally, Imperial’s share price has held up relatively well (down less than 6% in the past 12 months), which makes stock-based purchases less dilutive.

But Imperial has held back so far, partly because it was spending money on completing the Kearl expansion. The company may have also believed that assets would get even cheaper.

Now the story has changed slightly. The Kearl expansion is complete, and the upstream capital budget has been slashed by more than 60%. There’s a good chance that oil prices have already bottomed out. And Imperial has an extra $2.8 billion it can use to do whatever it wants. Historically, that has meant share repurchases, but the company can probably score better deals with acquisitions at this point.

Couche-Tard: more of the same

Couche-Tard will be assuming control of 279 of the sites and paying just short of $1.7 billion. At first glance, this seems like a very high price, especially since some analysts had pegged the total value of the 479 locations at $1 billion or less.

But on closer inspection, the deal makes sense for Couche-Tard as well. The retail sites are in very high-density markets, mostly in the Greater Toronto Area. There are also plenty of synergies, partly due to greater bargaining power with suppliers. And the integration should be relatively straightforward.

Most importantly though, Couche-Tard has been very successful at acquiring convenience store franchises and getting the most out of them. It’s how the company has increased its share price by 600% in the past five years.

So, hopefully for Couche-Tard and its shareholders, the company can apply the same formula to its recent purchase. And in the meantime, the deal is still accretive to earnings, despite the high price tag. Investors have reacted positively so far, sending the shares up by about 1%.

Thus it seems like both Imperial and Couche-Tard benefit from this deal. Time will tell.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Benjamin Sinclair has no position in any stocks mentioned. Alimentation Couche-Tard is a recommendation of Stock Advisor Canada.

More on Investing

Electric car being charged
Dividend Stocks

2 Growth Stocks to Buy Before a Big Rally

Despite market volatility persistently plaguing the market, these two TSX stocks might be worth considering right now to prepare for…

Read more »

Increasing yield
Energy Stocks

Buy the Dip: 1 Blue-Chip Energy Stock With a Rising Dividend Yield

Suncor Energy (TSX:SU) stock is approaching deep-value territory, making it a top pick for Canadian value and income investors.

Read more »

clock time
Bank Stocks

Is Now the Right Time to Buy CIBC Stock?

CIBC stock offers a big dividend yield. Is CM stock a buy?

Read more »

Dollar symbol and Canadian flag on keyboard

2 Undervalued Canadian Stocks Worth a Buy Right Now

You don’t need to look far to find a discount on the TSX today. Here are two Canadian stocks currently…

Read more »

financial freedom sign
Dividend Stocks

2 Cheap TSX Stocks That Could Make You Rich

Keep these two cheap TSX stocks on your radar if you seek immense wealth growth potential for your self-directed portfolio.

Read more »

oil and natural gas
Energy Stocks

Could Cenovus Energy Stock Hit $30 This Year?

Should you buy Cenovus Energy stock now?

Read more »


3 Stocks to Buy if They Take a Dip

Here are three stocks to buy for investors seeking exposure to high-quality Canadian stocks that may trade at a discount…

Read more »

Increasing yield
Dividend Stocks

3 Ultra-High-Yield Dividend Stocks You Won’t Regret Owning in 2023

Buy these monthly dividend stocks now with insanely high yields and look forward to immense growth by the end of…

Read more »