Canadian convenience store operator Alimentation Couche-Tard Inc has been quietly reassuring shareholders about its growth strategy after its abrupt plan to buy French retailer Carrefour SA befuddled investors and cast doubt about the stock's short-term prospects.
Couche-Tard's $20 billion approach for Carrefour was rejected by the French government earlier this month on food security concerns.
Unchartered Territory
The bid for Carrefour pushed the Quebec-based company into unchartered territory - an untested market, a relative new business segment and its biggest deal yet - surprising shareholders.
"I guess it alleviated a lot of my concerns ... though not entirely," one top-ten Couche-Tard shareholder who participated in a call with the management said. "It was helpful in terms of how they thought they could have created value by combining businesses."
Investors have marked down the stock 10.2% since the news of the bid emerged, and the spread on the company's $750 million bond maturing in January 2050 has widened 12 basis points as investors demanded a higher return.
The stock price suggests a good number of investors are not comfortable with the revised strategy, the investor added.
Couche-Tard did not respond to a request for comment.
Founded in 1980, Couche-Tard has grown from a single store in Quebec to a global network of convenience stores and gas stations with a $33 billion market value, with 66 acquisitions along the way.
'Management Discount'
Shareholders who stuck by management's strategy have been handsomely rewarded with the stock surging 733% over the past decade compared with the benchmark Canada index's 34.6% gains.
"It's one of Canada's best-run companies," said Greg Taylor, a portfolio manager at Purpose Investments, who bought some of the stock after the sell-off.
"It may not bounce back immediately as some investors will place a ‘management discount’ on the stock as this deal surprised them. But this company should still be positioned to grow and benefit when markets/economies reopen," he added.
The Carrefour bid was jarring as executive chairman Alain Bouchard told shareholders in September that "Couche-Tard doesn't seek to make a splash," emphasising how patience and rigour have served the company well.
Despite the failed attempt, Couche-Tard plans to revive its bid if it sees a change in the French government's stance, CEO Brian Hannasch said.
Move Toward Grocery
"It is hard to understand what the desire is to move toward grocery, particularly in Europe," said Mike Archibald, a portfolio manager at AGF Investments, pointing to "significantly lower" margin in grocery business compared with Couche-Tard's core operations.
Archibald said grocery retailing is not the sweet spot of Couche-Tard's strategy but the company is "tremendously good" at expanding retail gas and convenience stores. AGF owns Couche-Tard shares.
For now, Couche-Tard's dual-class structure gives its four founders including Bouchard super voting rights, meaning ordinary shareholders have little say in approving deals, an advantage that expires in 11 months.
Innovate And Grow
In July 2019, Couche-Tard announced plans to double its net earnings in the next five years and Bouchard is looking at ways to innovate and grow.
Since then, the company has dropped plans to buy Caltex Australia and sources said the collapse of the Carrefour deal has yet to revive the Australia deal.
Buying a grocery chain would help Couche-Tard diversify from its core fuels business which faces threat from rapid growth in electric vehicles, one of Couche-Tard's top-10 investors said.
"I would hope longer-term investors would come around, and should they enact on acquiring a food retailer and demonstrate they can operate this well, then I think the stock will do very well," the shareholder said.
