'Too Big for Couche-Tard'?

Analyst speculates that it could acquire pieces, but not all of Valero's retail network

Published in CSP Daily News

MONTREAL -- Valero Energy Corp.'s retail business may be too big for Alimentation Couche-Tard Inc. to acquire unless it is broken up into smaller pieces, said an industry analyst, according to a report by the Canadian Press.

In July, San Antonio, Texas-based Valero announced that it would be reviewing options regarding the retail network, including a spinoff or sale. While the company's official position is that no decision has been made, as previously reported in CSP Daily News, people familiar with the matter say it is selling its retail business for more than $3.5 billion (see Related Content below for previous coverage).

Valero's retail business consists of nearly 1,000 c-stores and gas stations in the United States and approximately 775 units in Canada--about 380 in Eastern Canada under the Ultramar brand.

The prospect of a sale has attracted the interest of private-equity firms and convenience store operators.

Most respondents (73%) to a CSP Daily News poll last week said that they expect Valero to sell its retail network; 18% expect it to spin off retail (8% expect the company to keep it or do something other than sell or spin it off).

Analyst Peter Sklar of BMO Capital Markets estimated Valero's retail network could fetch up to $4 billion, a price likely too rich for Couche-Tard, said the report.

Sklar suggested the Laval, Quebec-based company could only raise up to $1.9 billion in new debt without hurting its credit rating and would have to substantially dilute its share base if it partially funded it by issuing new shares.

"In the event that Valero decides to auction its retail business in smaller, regional prices rather than as a whole, we believe that Couche-Tard could then potentially become an acquirer," he wrote in a report cited by the news agency

Couche-Tard has said it wants to reduce its debt from buying Scandinavia's Statoil Fuel & Retail earlier this year for $2.9 billion; however, it continues to look for acquisition opportunities and recently completed some small deals in Florida and Washington.

Irene Nattel of RBC Capital Markets said it is not clear that Valero will ultimately sell the retail operations. "Apparently, it is more advantageous from a tax perspective to spin it out to shareholders," she told the Canadian Press.

That's what oil giant Statoil did with its retail operations before they were ultimately sold to Couche-Tard, the report said.

Analysts expect Couche-Tard to discuss acquisitions on Friday when Couche-Tard meets shareholders at its first annual meeting since acquiring Statoil Fuel & Retail.

Couche-Tard's network includes approximately 6,100 c-stores throughout North America, including about 4,500 stores with fuel. It has agreements for the supply of motor fuel to 357 sites operated by independent operators. Its North-American network consists of 13 business units, including nine in the United States covering 40 states and the District of Columbia (under the Circle K banner) and four in Canada covering all 10 provinces (under the Couche-Tard and Mac's banners). Through its acquisition of Statoil Fuel & Retail, Couche-Tard also operates a broad retail network across Scandinavia (Norway, Sweden, Denmark), Poland, the Baltics (Estonia, Latvia, Lithuania) and Russia with about 2,300 stores and sites.