Alimentation Couche-Tard (TSX:ATD) stock has been in a rough spot since peaking back in February. Undoubtedly, the Canadian convenience store giant is a master at building long-term value via smart M&A moves. Any time the company announces a deal, the stock should be trending higher, given acquisitions are a key driver of earnings growth. Indeed, Couche-Tard’s incredible managers are a major reason the firm has been able to consistently nudge earnings growth higher.
Though M&A news tends to be perceived as a good thing, many investors don’t seem to be big fans of the proposed 7-Eleven takeover. Indeed, there’s been quite a bit of back and forth over the past several months. And though Couche-Tard has been known only to make deals that entail massive value, many investors may wonder if there’s a risk of raising too much debt to get a massive US$47 billion done. That’s nearly CA$65 billion for a company with a market cap just north of the $70-billion level.
Indeed, it’s not the bite-sized deal that investors have grown accustomed to over the years. Even the more prominent deals haven’t been as massive as the proposed 7-Eleven deal. Either way, investors are clearly concerned that the Quebec-based convenience retailing firm may be biting off just a bit more than it can chew. Indeed, nobody wants to face significant shareholder dilution to get any sort of deal done.
More debt, less dilution? Is that a good idea?
More recently, Couche-Tard’s chief financial officer (CFO), Felipe Da Silva, said that most of the US$47-billion deal would be done by raising debt and that any new equity sales would be “minimal.” That’s encouraging news for those rattled by the potential dilution. Just how much debt is Couche-Tard willing to raise to get a deal done?
Mr. Da Silva stated his firm’s willingness to have a debt-to-earnings ratio of more than four. That’s a lot of debt. That said, the company clearly sees an opportunity to pick up the convenience retail behemoth in this environment. And it’s shown that it’s more than willing to swing at a picture-perfect pitch that may not come around again.
That said, is it so much better to raise a boatload of debt?
Couche-Tard has maintained a pristine balance sheet for most of its life. And though a massive 7-Eleven takeover would weigh heavily on the balance sheet for many years to come, I still think that investors have little, if anything, to worry about.
Why?
Any such debt loads seem more than manageable, especially for an earnings growth juggernaut like Couche-Tard. Management knows how to chip away at debt like few others in the industry!
The convenience retail business is relatively stable, predictable, and cash flow-generative. Even if the company were to “stretch the leverage of the company” to the limits, I’d argue that Couche-Tard may be in a better spot to repay the debt far sooner than expected, especially if it’s able to unlock synergies sooner rather than later.
The bottom line
Indeed, there’s a lot of low-hanging fruit over at 7-Eleven, a convenience retailer that’s really been treading water in recent years. In the hands of Couche-Tard, I do think 7-Eleven could become vastly more profitable, unlocking a magnitude of synergies that could make the troubles of acquiring the Japanese-owned giant worthwhile.
