Couche-Tards pursuit of Caseys will see some bumps in the road

Couche-Tard's pursuit of Casey's will see some bumps in the road

Couche-Tard, the Canadian convenience store operator, will need to be in it for the long haul if it wants to succeed in its pursuit of US rival Casey's General Stores.

On Friday (9 April), Couche-Tard, the fourth-largest c-store operator in North America, went public with its bid for Casey's after the US group turned down its first, behind-closed-doors approach.

Couche-Tard, which said it had been trying to engage in talks with Casey's since the autumn, adopted a hostile approach after Casey's rejected a US$1.9bn bid at the end of last month - almost three weeks after the Canadian group tabled its offer.

In its public statement, Couche-Tard said its $36-a-share offer gave Casey's investors a 14% premium on the price of the US retailer's shares on Thursday.

The market turned its nose up at that argument as Casey's shares jumped 24% to $39.10 when the news of Couche-Tard's offer broke. Casey's shares still higher yesterday (12 April), reaching $39.22.

It's clear that Couche-Tard will need to return to the table with a higher offer to stand a chance of securing Casey's. The market thinks so and, judging by the comments from Casey's management. the US retailer would stand for nothing less.

Couche-Tard, which has been aggressive in its acquisitions south of the border (it runs over 3,500 stores in the US, most under the Circle K banner), had put the brake on its M&A activity during the recession. But now, with signs of recovery becoming clearer, the company seems to be looking to bolster its business via the chequebook.

Casey's boss Robert Myers, however, is unimpressed, arguing that Couche-Tard's offer for the US group "underscores that you are attempting to acquire US companies on the cheap".

Industry watchers were also less than bowled over by Couche-Tard's approach. Karen Short, a retail analyst covering Casey's, said Couche-Tard's offer was "inadequate" and raised her target price on the US retailer's shares from $36 to $39.

"[The offer] fails to take into consideration the value of [Casey's] 100%-owned real estate portfolio; $1.3m per store is nowhere near what “replication” of Casey’s footprint would cost," Short wrote in a note to clients.

"Two, the offer states the $36 is a 24% premium to the last year’s average closing price – in our view – completely irrelevant given the weakness all stocks experienced in the early 2009 time frame. And three, the offer is only a modest 14% premium to Thursday’s close."

Couche-Tard has yet to make a public statement in response to the Casey's rebuttal but, given, it is now six months since the Canadian group first tried to approach the US firm, it is unlikely the company is going to go away without a fight.

Michael van Aelst, an analyst at TD Securities in Montreal, notes that an acquisition of Casey's would see Couche-Tard move into some new US states, including Kansas, Minnesota and Wisconsin.

"Casey’s would be a very good fit for Couche-Tard in our opinion," van Aelst said. "Its stores are well run, many have been renovated recently (though we don’t believe they are at the same standard as a new Couche-Tard store given the rural locations) and have a significantly larger foodservice offering that represents 25% of in-store revenues. Moreover, there is almost no overlap in the locations of the two companies’ stores."

Canadian companies have a patchy record south of the border but Couche-Tard has been one of the more successful as it builds a growing convenience store portfolio in the US.

However, there looks set to be some bumps in the road ahead as it looks to add Casey's to its US business. Tomorrow (14 April) is the deadline to propose items for the agenda at Casey's September AGM. A proxy battle looks on the cards.