Pedestrians walk past a Couche-Tard convenience store in Montreal, April 18, 2012.Christinne Muschi/Reuters
Alimentation Couche-Tard Inc. searched high and low for businesses to buy, but in the end, a recovering brand in a familiar market won out.
Couche-Tard had been vocal about its acquisition plans for months. On a November conference call, Brian Hannasch, chief executive of Couche-Tard, said the company was "actively looking at opportunities of different sizes in different countries."
Southeastern U.S. convenience store company The Pantry Inc., with its fresh food and gas station offerings, ultimately won Couche-Tard over. Pantry's 1,500 stores and 15,000 employees will bolster Couche-Tard's existing brand of Circle K convenience stores in the region, giving the company a dominant share in the market in states such as Florida, management said in a call with media on Thursday. Mr. Hannasch said that adding Pantry's network through 13 states from Virginia to Louisiana – and eventually combining brands – would strengthen Couche-Tard. But the company hasn't yet decided how such a brand integration will happen.
It's the second-largest deal ever for Couche-Tard, after buying the retail group of Norway's Statoil oil-and-gas company in 2012 for about $2.8-billion.
Pantry, which operates largely under the Kangaroo Express convenience store name, is in the midst of shoring up its operations and has put in place new measures to cut costs, price fuel more consistently and make sure merchandise reflects local markets, in order to keep up with competing convenience stores, dollar stores and grocers. Pantry management has said progress will be gradual and the company still has "a long way to go." The plans include remodelling some stores and closing weak performers as leases expire.
Mr. Hannasch said there's an opportunity for Couche-Tard to invest in revamping many of Pantry's convenience stores. He also thinks it can improve their fresh food offerings.
Couche-Tard said that Pantry's most crucial reorganization has been financial, in reducing leverage, rather than in operations. Couche-Tard certainly knows how to pay down debts, having switly strengthened its balance sheet after its Statoil purchase.
A Moody's review of the company's debt on Thursday concluded the purchase of Pantry wouldn't change its stable outlook on Couche-Tard. The purchase would increase the company's leverage from 2.4 times its earnings before interest, taxes, depreciation and amortization, to 3 times. But the company plans to use free cash flow to reduce that ratio to 2.5 times within one year and 18 months of closing the deal.
The one thing Pantry may be able to teach Couche-Tard about is restaurant partnerships, management said. Pantry operates more than 200 quick-service restaurants, the largest being a number of Subway sandwich shop franchises. Couche-Tard has some Subways, too, but the restaurants are not part of the company's growth strategy in the same way. Mr. Hannasch says Couche-Tard will look at the economics and returns of the franchises, which also include Little Caesars, Dairy Queen and others, before deciding how to proceed.
There may be some geographic overlap among the areas served by the two companies' stores, but Couche-Tard doesn't see these as hurdles to closing the deal. The acquisition is expected to be accretive to Couche-Tard within the first year of integration.