There’s been quite a lot of buzz and unfounded negativity surrounding Alimentation Couche-Tard (TSX:ATD) stock and its ongoing pursuit of 7-Eleven’s parent company, 7 & I Holdings.
Undoubtedly, there’s a lot on the line if the Quebec-based convenience store firm behind Circle K can successfully acquire the legendary 7-Eleven. Indeed, it’s not hard to imagine that Couche-Tard was always just sitting on the sidelines over the years, waiting for the perfect time to pounce on its massive convenience store rival.
With shares of 7 & i Holdings (they’re listed in the Japanese stock market) trading at what I believe is a historically discounted multiple, the big news of Couche-Tard’s interest in buying the firm should come as no surprise. Indeed, should a deal be struck, Couche-Tard stands to be an even more dominant firm in the business of convenience retailing. Despite concentrating market power in Couche-Tard’s hands, the global industry remains incredibly fragmented.
As such, I believe that regulatory hurdles aren’t the massive factor here, as they were when Couche-Tard attempted to buy up French grocery retailer Carrefour a few years ago. Japan has really warmed up to foreign investment and takeovers. However, that’s no guarantee that Couche-Tard will be able to walk away with the one convenience retailer that’s perhaps better known as Circle K.
Undoubtedly, 7-Eleven and Circle K are the number one and two brands on the planet. And while 7-Eleven would allow Couche-Tard to break into the Asian market in a big way (and at a sizeable discount), there’s a lot of work to be done before a deal has the hopes of closing.
A 7-Eleven deal could be costlier as 7 & i rejects Couche-Tard’s bid
The biggest hurdle, I believe, lies in the price to be paid. Indeed, Couche-Tard seems to want a friendly deal. And though the current offer (of more than $38 billion) entails a boatload of debt and shareholder dilution via new share issuance (that’s been a major reason ATD stockholders have been selling in recent weeks), 7 & i seems to want more.
Though the price seems high, I believe that Couche would be getting a relative bargain at such prices. If the deal lands, Couche-Tard would have more than 100,000 stores in the portfolio, making it a behemoth that could grow to become one of Canada’s largest companies.
After rejecting Couche-Tard’s initial offer, the ball is now in Couche-Tard’s court. As it stands, Couche-Tard remains interested. However, questions linger as to how much the firm will sweeten the pot and if the firm is willing to raise more debt or dilute its shareholders by a greater deal. Either way, I think such a deal would be profoundly beneficial to the firm over the long run, even if there’s a bit of risk over the near term.
Bottom line
To doubt Couche-Tard’s ability to drive massive synergies from such a deal is to go against Couche-Tard’s legendary managers, who’ve proven time and time again that they know how to extract value from most deals they make. The 7-Eleven deal makes all past deals look tiny in comparison. And while the stakes are higher, I still think Couche-Tard has a good chance of walking away with a huge bargain, even if the firm stands to pay closer to $40-42 billion to get the deal done.
At the end of the day, 7-Eleven has issues that have weighed down its stock. Couche-Tard is the perfect firm to bring out the best in assets that may not be in an optimal spot.
