Couche-Tard shows no stomach for Casey's fight
Alimentation Couche-Tard Inc. can expect a fight from takeover target Casey's General Stores, and the Montreal-based convenience store chain is showing a notable lack of enthusiasm for the $1.9-billion (U.S.) battle.
After months of attempting to strike a friendly deal with Iowa-based Casey's, Couche-Tard went hostile in April with a $36-a-share offer.
Casey's responded by doing what U.S. companies typically do when facing unwanted overtures from pushy rivals: The board hired Goldman Sachs to work on defence, and told the Canadian company to get lost - the precise wording for rejecting the bid is that it's a "self-serving and transparent attempt by Couche-Tard to take significant value that rightly belongs to Casey's shareholders."
Here's where Couche-Tard, owner of 5,800 stores and an experienced acquirer, is putting a half-hearted effort into this deal.
The Canadian company established a toehold in Casey's prior to tabling its offer, quietly building a 3.9 per cent stake in the 1,500-store chain. This is a standard feature in takeovers.
What's far from standard is what happened next. The latest regulatory filing from Couche-Tard shows it sold its Casey's position at $38.43 a share, after the takeover was launched and the stock price took wing. The Canadian company now owns just 362 Casey's shares, going into a potential proxy contest for control where every vote could count. Casey's is portraying the sale as a sign that the buyers just aren't serious.
"Couche-Tard's decision to sell a significant ownership stake which would have been helpful to them in a proxy contest raises serious questions about their level of commitment to completing a transaction," Casey's said in a press release.
This isn't just spin. In a report to clients, Scotia Capital analyst Catharine Sterritt said: "Couche-Tard's decision to sell its toehold position of approximately two million Casey's shares at the time they announced their $36 proposal ... suggests Couche-Tard is very price sensitive."
"Despite having a very compelling strategic fit and potential synergies, Couche-Tard has not applied sufficient pressure on Casey's to put the company into value max mode," Ms. Sterritt said. Scotia Capital and other investment banks have published laundry lists of the tactics that Casey's and Goldman Sachs can use to escape Couche-Tard's grasp.
Casey's has next to no debt on its balance sheet. The chain also owns the real estate under most of its stores and distribution centres, land worth an estimated $500-million that analysts say is not reflected in the share price.
"The Couche-Tard bid could well prompt Casey's board of directors to authorize management to use the balance sheet to repurchase shares," said a report on Monday from analysts Chuck Cerankosky and Alex Bisson at Northcoast Research, a Cleveland-based investment dealer. The pair expect the defensive strategy to be laid out when Casey's announces financial results on June 14, and predict the company will "generate meaningful share price appreciation beyond what Couche-Tard is likely to offer."
"We continue to believe that Casey's has the ability to propose a leveraged recap with special dividend as an alternative to Couche-Tard's bid," said Scotia Capital's Ms. Sterritt.
Along with selling its Casey's shares, Couche-Tard made an offer for the U.S. chain that is conditional on financing. Casey's is now going out of its way to point out that this injects uncertainty into the bid. Again, the target company has a good point.
In contrast to Couche-Tard's approach, Agrium paid the fees necessary to lock in bank loans when it went hunting for fertilizer rival CF Industries.
Agrium's lengthy and ultimately unsuccessful pursuit of CF Industries highlights a central theme in hostile takeovers: Even the most determined suitor is often rebuffed. While there are still miles to go in Couche-Tard's bid for Casey's, the Canadian company's actions to date show it has no stomach for a marathon struggle.
See Andrew Willis's Streetwise Blog at ReportonBusiness.com
