Shares of Circle K-owner Alimentation Couche-Tard (TSX:ATD) saw its stocks hit the brakes in recent sessions, thanks in part to big news that it’s planning to buy major convenience store competitor 7 & i Holdings, a Japanese-based firm behind 7-Eleven stores. Undoubtedly, if the deal goes through, it could be the biggest Canadian merger and acquisition (M&A) move of the decade.
Of course, that’s a big if. Couche-Tard needs to appease various regulators. Whether that entails divesting a few of 7 & i Holdings’s assets (it owns more than just convenience stores) or more, I think that the Couche’s management team will do their best to ensure everything is in a great spot and that a deal can be struck.
Indeed, if Couche-Tard senses synergies, you can bet that it’ll be more than willing to go after a deal. While Couche-Tard has a sound balance sheet and cash flow stream, buying up 7-Eleven’s parent company will entail a whole lot more financing. That means new share issuance and a greater debt load.
The synergies could be huge for Couche-Tard
Though investors worry about getting diluted as ATD potentially looks to list on U.S. exchanges, I’m not at all worried, as a 7 & i Holdings deal would likely result in some sort of “1 + 1 = 3” synergistic scenario. Additionally, Couche-Tard’s managers have been very vocal about expanding into the Asian region, a relatively untapped part of the globe that could entail not only greater growth but perhaps better margins.
Further, 7-Eleven is a wonderful franchise with a brand name that’s synonymous with convenience stores. It’s the legendary firm behind the Slurpee. And I think that Couche-Tard won’t need to rebrand any of the locations, given the massive magnitude of brand affinity the 7-Eleven banner entails. Arguably, 7-Eleven is a bigger brand than Circle K.
Couche-Tard would be even stronger with Circle K aboard
In any case, I think Circle K, 7-Eleven, and Couche-Tard (in Quebec) can co-exist under the same umbrella. Further, after many years of rebranding (to Circle K) efforts, I think management is more focused on driving merchandise sales and seizing the gas-fuelled car-to-electric vehicle (EV) transition. Should a 7-Eleven deal go through, I see Couche-Tard as on the high road to succeeding in the EV age as it bolsters its merchandising while using its even greater economies of scale to drive prices down.
Though some may view a 7-Eleven deal as unlikely to go through anytime soon, I think such a deal could pass should Couche-Tard prove it can deliver value for consumers. At the end of the day, convenience retailers need to adapt to the new age. That entails embracing artificial intelligence, frictionless checkout, mobile apps, delivery, and all the sort.
Bottom line
Such investments would have a greater effect if 7-Eleven were to be a part of the Couche-Tard portfolio. As one of the few early bulls on the deal, I’d not shy away from buying shares of ATD on the recent dip. They’re flirting with correction territory again after sliding close to 6% in a week.
Further, with earnings on tap in the coming weeks, it’ll be interesting to see how ATD stock reacts from here. I think the 7-Eleven deal-induced pullback is overblown now. In short, a 7-Eleven deal could be a match made in heaven, and any further weakness in ATD stock seems like a buying opportunity for long-term investors.
