Couche-Tard is French for night owl. Aptly, news of a takeover approach from the eponymous Canadian group for French supermarket chain Carrefour emerged late on Tuesday. But the logic of the proposed deal does not stand up to the cold light of day.
Carrefour must appear cheap to the Canadian fuel and convenience stores empire, owner of the Circle K chain. Even after a 15 per cent rise to just under €18 on Wednesday — still below Couche-Tard’s €20-a-share non-binding offer — Carrefour’s shares are worth little more than half what they were 10 years ago. The enterprise value of the French company is six times ebitda, compared with more than nine times for Couche-Tard.
Paying a 30 per cent premium for Carrefour would imply an enterprise value of €24.3bn, including adjusted net debt of €9.6bn. Assuming combined ebitda is €8.4bn and net debt of €4bn for Couche-Tard, the gearing would be just tolerable at nearly 3.4 times if it fully paid in cash. However, the acquirer has signalled it will also use some shares, potentially lowering this ratio.
A deal is not advisable simply because it is possible. A petrol station and convenience store chain can run a grocer, one justification offered for last year’s £6.8bn acquisition of Asda by the owners of EG Group.
But the Canadian group’s stated vision is to become the world’s preferred destination for fuel and convenience. Carrefour will distract from that mission. The target struggles to fend off discounters.
Couche-Tard proudly boasts an average return on capital employed of 15.4 per cent since 2011. Paying a premium for Carrefour would put that under strain.
Cross-border retail deals mostly fail. Walmart’s purchase of Asda flopped, as did Tesco’s Fresh & Easy venture in the US. Moreover, there is virtually no overlap between these two combining companies, either in geography or format.
The paucity of cost-cutting opportunities should limit opposition to the foreign purchase of one of France’s largest employers. So might the Quebec-based company’s fluency in French — though the language skills of American boss Brian Hannasch have not always impressed critics.
But French sensitivity to foreign takeovers — demonstrated when yoghurt maker Danone was deemed of strategic national interest — should not be underestimated. The share price rise suggests that investors view Carrefour as a plausible bid candidate. But they should not count on Couche-Tard succeeding in its approach.
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