Alimentation Couche-Tard Inc.’s (TSX:ATD.B) growth story has been nothing short of amazing. It has grown from a single convenience store in Quebec in 1980 to more than 7,900 stores in North America, more than 2,200 stores in Europe, and about 1,500 licensed stores in the rest of the world today.
Its expansion has been rewarding to shareholders. In the last five years, Couche-Tard has appreciated 600% and has increased its dividend by 30% on average per year. And it looks like its growth story will continue to play out as it enters into another merger.
Another merger
Couche-Tard just entered into a definitive merger agreement with one of its competitors, CST Brands Inc., and Couche-Tard’s shares reacted by heading more than 6% higher intraday.
Not all acquisitions and mergers are beneficial to the company and shareholders. However, Couche-Tard’s return on equity (ROE) has been consistently high.
The ROE is a way to measure profitability; it calculates how many dollars of profit a company generates with each dollar of shareholders’ equity. It indicates that Couche-Tard is putting capital to good use, as its ROE has ranged from 19% to 25% since 2009.
The transaction
Couche-Tard intends to acquire CST in an all-cash transaction for US$48.53 per share, which is 22 times CST’s 2015 earnings. This is a total enterprise value of about US$4.4 billion including net debt assumed.
CST will strengthen Couche-Tard’s U.S. presence, as CST has more than 2,000 locations throughout the southwestern United States with a meaningful presence in Texas, Georgia, the state of New York. It also has a presence in eastern Canada.
CST also controls the general partner of CrossAmerica Partners LP, which distributes road transportation fuel to more than 1,100 locations in the U.S. and owns and lease real estate used in the retail distribution of motor fuel.
Couche-Tard plans to finance this transaction through available cash, existing credit facilities, and a new term loan. The transaction is expected to close in early 2017 and is subject to the approval of CST’s stockholders and regulatory approvals in the U.S. and Canada.
Couche-Tard has already entered an agreement with Parkland Fuel Corporation pursuant to which it would sell about US$750 million of CST’s Canadian assets after the merger. Couche-Tard intends to use the sale proceeds to repay part of its credit facilities.
Conclusion
Couche-Tard grows via organic growth, acquisitions, and mergers. If history is indicative of the future, Couche-Tard will combine the capabilities of the CST team to make Couche-Tard an even stronger company.
Couche-Tard’s ability to integrate acquisitions successfully is evident by its consistently high ROE while maintaining a strong balance sheet.
As Couche-Tard grows, its share price and dividend will likely grow at an above-average rate like it has in the past.
