Shares of Canadian convenience store operator and consolidator Alimentation Couche-Tard (TSX:ATD) have been dragging recently. Sure, the company is going after 7-Eleven’s parent company (7 & i Holdings), and it’ll likely have to up its offer to get a deal done. Though I have no idea what the final price will be, I think that management is keen on landing a friendly deal, one that entails massive value creation for the long-term shareholders of Couche-Tard.
In prior pieces, I’d noted that the 7-Eleven deal news negativity was getting excessive. Sure, it’s a gargantuan deal that will entail a boatload of debt. That said, Couche-Tard is one firm whose cash flows are so steady that I wouldn’t worry if it were to punch above its weight class by raising a considerable amount of debt.
Couche-Tard: The perfect time to make a historic deal
For the most part, Couche-Tard’s balance sheet has been in impeccable condition. But whenever there’s an opportunity to swing for the fences, Couche-Tard’s top bosses know that a bit of debt is not necessarily a bad thing.
With rates headed lower from here and valuations in the industry contracting modestly, I’d argue that there’s a bit of a “Goldilocks” environment for a merger and acquisition giant like Couche-Tard as it continues executing on the growth-by-acquisition model that had helped it become one of Canada’s largest companies. For now, nobody knows when the 7-Eleven deal overhang will keep weighing down shares of ATD.
I would have thought a mild 10% correction would have been overblown. With ATD stock sinking another 1.42% on Wednesday’s session, they’re now down just below 15% from their all-time highs. Indeed, it’s a correction that value-focused dip-buyers have likely been waiting for.
The stock looks deeply undervalued, but watch out for the technical backdrop
With a dividend yield flirting with 1% and a growth rate that’s not about to slow, I find few reasons to avoid the company as shares come in further. However, I acknowledge that the chart does not look great from a technical perspective, with a potential double-top pattern that may be in the works. I’m not a huge follower of the technicals.
That said, when it comes to Couche-Tard, I would have a game plan to buy on the way down should the double-top come to fruition and shares sink another 15% or so from current levels. Indeed, at around $64 per share, shares of the convenience store firm would be a severely undervalued bargain hiding in plain sight, regardless of what’s to unfold with this 7-Eleven deal.
Given the likelihood that Alain Bouchard (Couche’s founder and former chief executive officer) and his team have been watching 7-Eleven closely for many years, if not decades, in search of the perfect multiple to swoop in with an offer in hand, I’d argue that things could go either way. And that either scenario would be a plus for long-term shareholders.
The bottom line
While 7-Eleven’s owner may claim that the first offer undervalues the company, the market is telling us that the premium that Couche-Tard will pay is a fair one.
Indeed, 7-Eleven could incorporate some of the talents over at Couche-Tard before its sticky situation becomes worse than the floor near the slurpee section of the store. In any case, I’d look for the second Couche-Tard offer to be sweeter, but not by much!
