Alimentation Couche-Tard Inc (TSX:ATD) has given investors a wild ride this year. It underwent a major crash in March, falling 10% after an earnings release disappointed investors. Then in August, it started rising again, after announcing that it had put in a bid to buy Seven & I, the Japanese owner of 7/11. The deal would make the combined company the leading convenience store company in the world. However, the Japanese target is resisting ATD’s offer, making this a hostile takeover attempt.
Alimentation Couche-Tard has a lot of things going for it. However, the 7/11 deal so far doesn’t look to be one of them. The company is planning on issuing a large amount of debt to buy the Japanese firm, but is encountering fierce resistance from the target company.
The large (potential) debt issuance is somewhat contrary to the approach that made ATD a successful company in the first place. ATD always kept debt within reason, financing deals with as much retained earnings as possible. This time around, ATD is offering $39 billion and financing most of it with debt. That’s about three-quarters of the company’s market cap, and twice its book value!
It seems there’s a possibility that ATD is getting “greedy” to buy 7/11, and is throwing caution to the wind. However, there’s also a good chance that the deal may not close at all, so that might not be such a problem
7/11 resists the takeover
So far, it doesn’t look like Seven & I is eager to sell either itself or its 7/11 holdings. It recently petitioned the government to make it a “core” industry like semiconductors, which would prevent it from being sold to a foreign company. Basically, Seven & I is not on board with Couche-Tard’s plans. And since the “core” designation is a legal one, once Seven & I attains it, then it’s game over for ATD’s ambitions.
Latest earnings
Setting aside the entire matter of the 7/11 takeover, ATD is a well-run company. We can see signs of that in its most recent earnings release. In the most recent quarter, Alimentation Couche-Tard delivered:
- $17.6 billion in revenue, up 8.2%.
- $2.8 billion in gross profit, down 4%.
- $642 million in operating income, down 31%.
- $454 million in net income, down 32%.
Overall, it was a decent showing. Although earnings declined and missed estimates very narrowly, revenue grew (after several quarters of declining) and beat expectations. The strong top-line performance points to the possibility of stronger bottom-line performance in future quarters.
Foolish takeaway
Taking everything into account, ATD looks like a reasonable buy today. While I certainly don’t think it is going to be a tenbagger all over again, like it was in the past, it has potential to perform as well as, or maybe slightly better than, the market. As far as the Seven & I deal goes: I’m not convinced. When the deal was announced people were talking about how cheap Japanese stocks in general were. Japanese stocks are cheap as a class, but this particular one isn’t, trading at 21 times earnings. It also doesn’t look like the deal is going to close. But ATD has decent top-line growth, a strong balance sheet, OK margins, and a great track record. It will probably do OK.
