Alimentation Couche-Tard’s $25-billion potential play for French-based grocery chain Carrefour SA is getting a thumbs down from its own investors and skeptical analysts.
The Quebec-based company’s shares plunged 10.5 per cent, or $4.35 at $36.96 in midday trading on the Toronto Stock Exchange.
Analysts questioned the rationale for the non-binding takeover offer at a price of 20 euros ($30.88 Cdn) per Carrefour share.
Peter Sklar of BMO Capital Markets said there’s “limited strategic rationale” for such an acquisition.
“We are skeptical that an acquisition of Carrefour by Couche-Tard or a combination of the two companies will come to fruition due to a number of considerations,” he wrote in a report.
‘A bit of a headscratcher’
A more compelling transaction, he said, would be to pursue Carrefour’s 7,700 global convenience stores.
Derek Dley of Canaccord Genuity called it a “questionable pivot.”
“We view the transaction as a bit of a headscratcher, as it would involve Couche-Tard partially departing from its core competencies of c-store and fuel retailing (which garner higher trading multiples) and instead venturing into the lower-multiple grocery business, which we believe would be viewed negatively by investors,” he wrote.
Dley added that the minimal geographic overlap and a challenging operating environment in France suggest that cost savings would be lower than Couche-Tard has realized in past transactions.
Still, the mostly cash transaction would be expected to add about 30 per cent to his fiscal 2022 earnings estimate.
The acquisition would potentially be a good fit with Couche-Tard’s 2,700 stores in Europe, added Chris Li of Desjardins Capital Markets.
Carrefour’s convenience stores account for about 10 per cent of its $11.42 billion in European revenues and $634 million of EBITDA (earnings before interest, taxes, depreciation and amortization).
Retail operations increasingly blurring
Couche-Tard could sell the grocery business but Li questions whether it makes sense to go through the trouble just to keep such a small share of the business.
“Based on Couche-Tard’s track record of walking away from deals that were either expensive or did not make strategic sense, we are confident this remains the case,” he added.
The lack of details about a potential transaction make it difficult to assess whether its historic financial discipline will be maintained despite its demonstrated willingness to “take bold steps to grow the company,” said Irene Nattel of RBC Dominion Securities.
She noted that retail operations are increasingly blurring with companies extending into adjacent businesses.
For example, Asda was purchased last October from Walmart by the consortium behind EG Group.
Couche-Tard said the terms of the proposal are under discussion and remain subject to diligence, but the consideration is expected to be in cash in large majority.
It cautioned that there can be no certainty at this stage if the talks will result in a deal.
Founded more than 60 years ago, Carrefour operates nearly 13,000 hypermarkets, supermarkets and convenience stores in France, Spain, Italy, Belgium, Poland, Romania, Brazil, Argentina and Taiwan.
About 48 per cent of $110 billion of revenues are in France, 30 per cent elsewhere in Europe, 20 per cent in Latin America and two per cent in Asia.
Carrefour has a market capitalization of $19 billion compared with $45 billion for Couche-Tard and an enterprise value of $41.8 billion versus $52 billion for the Canadian retailer.
Couche-Tard operates convenience stores mostly under the Circle K brand in Canada, the United States and Europe. It recently took steps to expand into Asia.