Couche-Tard makes biggest U.S. acquisition in its history with The Pantry

MONTREAL – Alimentation Couche-Tard is preparing for the largest U.S. acquisition in its history after striking a friendly deal to buy The Pantry Inc., a move that will increase its presence in the growing southern states.

The deal to acquire more than 1,500 locations in 13 states values North Carolina-based company at US$1.7 billion, with Couche-Tard paying US$36.75 cash per share. The purchase price includes more than US$860 million to purchase Pantry’s shares, with the rest going towards capital leases and debt.

The transaction trails only Couche-Tard’s US$2.8 billion purchase in 2012 of Scandinavia’s Statoil Fuel & Retail.

Couche-Tard stock (TSX:ATD.B) closed at an all-time high of C$46.21 Thursday on the Toronto Stock Exchange, up $3.67 or 8.63 per cent.

The Pantry’s stock (Nasdaq:PTRY) gained $1 or 2.8 per cent to $36.52 after rising 23 per cent on Wednesday amid reports of a transaction in the works. The offer is also 39 per cent above the 30-day average share price as of Dec. 16, prior to media reports.

Couche-Tard has one of North America’s largest network of convenience stores, operating primarily under the Couche-Tard and Mac’s banners in Canada as well as Circle K throughout the United States. The Laval, Que.,-based company gained a toehold in the U.S. in 2003 with the acquisition of 1,663 Circle K corporate stores in 16 states in a deal with ConocoPhillips.

The Pantry — which operates primarily under the Kangaroo Express banner — will increase Couche-Tard’s 1,225 stores in the Southeastern and Gulf Coast regions of the United States where population growth is double the national average.

“These are two networks that are very, very complimentary. We are pretty much in the same geographies but we don’t compete directly often so for us it’s really a good fit for the two companies,” Couche-Tard chairman Alain Bouchard said during a conference call.

Couche-Tard said it will become the market leader in some markets, including Florida. The Pantry’s stores, which are mainly in the north and east coast of the sunshine state, will complement Circle K’s 400 stores on the west coast and Orlando.

“It’s really a perfect amalgamation of these two companies, that’s why we have talked with them for a long time and are very happy to announce this transaction today.”

Couche-Tard won a bidding process against other interested buyers, but had first approached a former Pantry CEO about seven or eight years ago about a transaction. It is subject to a US$39.5 million break fee.

Couche-Tard CEO Brian Hannasch said he doesn’t anticipate any roadblocks to concluding the deal in the first half of next year.

Many of the details about the merger, including the branding of The Pantry locations and possible administrative mergers, have not yet been made, Hannasch said.

Founded in 1967, The Pantry grew mainly through acquisitions beginning in the late 1980s but has been cutting to reduce its heavy debt. Like Couche-Tard, it has been focusing on selling more high-margin fresh food. It also sells its own private label bottled water and is a large operator of Subway restaurants.

Hannasch said The Pantry’s fresh food program is a little behind Couche-Tard, but that it operates more than 200 fast food restaurants, a business model the buyer plans to study further.

“It’s a proactive piece of their growth strategy whereas we’re not doing that. I would say that’s the one big difference we need to explore and make a decision on.”

Pantry CEO Dennis Hatchell said the combination of the two complementary companies will benefit the current Pantry shareholders and provide opportunities for most of its employees.

The Pantry deal was reached about four years after the failure of Couche-Tard’s US$1.9-billion hostile bid for Casey’s General Stores.

Peter Sklar of BMO Capital Markets estimated that Couche-Tard could achieve US$75 million in operating cost savings, representing more than one-third of The Pantry’s EBITDA, and add about 20 cents per share to Couche-Tard’s earnings.

Pantry analyst Bonnie Herzog of Wells Fargo Securities said the agreed price is consistent with multiples paid over the past few years. “We believe this deal is positive and further demonstrates our thesis of ongoing industry consolidation in the convenience store space,” she wrote in a report.

With The Pantry’s stock tripling in value since April 2013 on improving results, she said it is not surprising that the company was an attractive target for Couche-Tard.

The Pantry has about 15,000 employees including about 500 at its corporate offices — compared with Couche-Tard’s more than 60,000 in North America. The Quebec chain also has some 17,500 employees in Europe where it operates 2,239 locations.

Follow @RossMarowits on Twitter

Note to readers: This is a corrected story corrects: An earlier version incorrectly said there were 6,000 Pantry employees