Couche-Tard bid for 7-Eleven parent to feature 'a lot of leverage and equity dilution'
Alimentation Couche-Tard’s (ATD.TO) bid for the Japanese parent company of the 7-Eleven convenience store chain will likely face scrutiny from regulators in the United States, where the two companies operate many neighbouring stores. That’s according to analysts, who also flag the amount of debt and equity dilution required to pay for a transaction of this size.
Seven & i Holdings (SVNDY) has over 85,000 locations across 18 countries, including the U.S., Japan and Canada. Couche-Tard’s network has more than 16,700 stores in 31 countries and territories. The proposed combination would create the largest convenience store player in the United States, according to RBC Capital Markets.
Financial terms of the proposed transaction were not disclosed. According to Bloomberg, the deal could be worth over US$38.4 billion, based on Seven & i Holdings’ market price on the Japanese stock market when the potential transaction was disclosed. Seven & i Holdings said on Monday that it is reviewing Couche-Tard’s proposal.
In a note to clients, RBC analyst Irene Nattle found 31 per cent of Couche-Tard’s Circle K convenience stores have at least one 7-Eleven or Speedway store within a one-mile radius. (7-Eleven operates Speedway-branded fuel and convenience stores in the U.S. Midwest and East Coast regions.) She found 19 per cent of 7-Eleven and Speedway stores have at least one Circle K store within a one mile radius.
“It is clear that there are material overlaps in the regional coverage of Circle K and 7-Eleven/Speedway locations,” Nattle wrote. “Any potential transaction would likely face significant scrutiny from regulators.”
She says early analysis suggests a deal would need to include plans to divest some stores.
BMO Capital Markets analyst Tamy Chen also warns a “decent overlap” in several U.S. states raises the risk of an anti-trust challenge by regulators.
In order to finance the deal Chen estimates Couche-Tard would need to take on US$13 billion in debt, and issue US$29 billion in equity, resulting in 50 per cent dilution for shareholders.
“This transaction, assuming it occurs and ATD acquires and keeps S&I's entire c-store business, comes with a lot of leverage and equity dilution relative to what could be gained," Chen wrote.
Nattle also noted a transaction would likely require a “sizeable equity component” from Couche-Tard.
The Toronto-listed stock closed 1.10 per cent lower on Tuesday, at $80.87 per share.
Speaking on Couche-Tard's quarterly earnings call in June, departing CEO Brian Hannasch told investors that the company will follow a disciplined approach to acquisitions.
"We're seeing more M&A opportunities than we have in quite some time," he said on June 26. "Our first-and-foremost commitment to our shareholders is to be disciplined."
Hannasch has led the Quebec-based company for 10 years, overseeing the acquisition of nearly 8,000 stores on multiple continents, according to the company.
Jeff Lagerquist is a senior reporter at Yahoo Finance Canada. Follow him on Twitter @jefflagerquist.
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