A person walks past a Couche-Tard in Montreal, Quebec, May 21, 2020.Christinne Muschi/Christinne Muschi/The Globe and
Canadian convenience store giant Alimentation Couche-Tard Inc. is pushing into the heart of Asia with a small but strategic acquisition in Hong Kong it bets will jump-start its future expansion in the region.
Couche-Tard said late Wednesday it agreed to buy Convenience Retail Asia Ltd. for 2.79-billion Hong Kong dollars, or roughly US$360-million. Convenience Retail subsidiary Circle K Hong Kong operates a network of 340 stores in Hong Kong and 33 sites in Macau under licence with Couche-Tard, the Laval, Que.-based company said.
Couche-Tard chairman Alain Bouchard and chief executive officer Brian Hannasch have been scouring the Asia-Pacific region in recent years looking for a takeover target that would give the company a toehold for its third leg of expansion after North America and Europe. This is the deal that plants that flag, opening up a new front to tap what Couche-Tard says is the world’s most explosive region of growth.
Couche-Tard’s leaders thought they’d found a way in a year ago when they announced a US$5.8-billion non-binding bid for Caltex Australia Ltd., now known as Ampol. But that takeover plan has since cooled after Ampol’s prospects and cash flow were made uncertain by the fallout of the COVID-19 pandemic.
“It’s about growth. They have a model that you can repeat in Hong Kong obviously but elsewhere in Asia and at a very fast pace,” Mr. Bouchard said in an interview Thursday, referring to Circle K Hong Kong’s small and boxy urban stores without gas pumps. “It’s going to be a big engine for us eventually.”
As part of the acquisition plan, Couche-Tard will be bringing Circle K Hong Kong’s senior leadership team into the fold. Tapping their knowledge on things such as transaction speeds and how to best use store space is more important than the size of the deal itself, Mr. Hannasch said.
Couche also has separate licensing agreements in Indonesia, Cambodia, Mongolia, New Zealand and Vietnam. Mr. Hannasch said his leadership team is open to making new types of deals as it grows in the region, depending on the specifics of each country. That includes striking partnerships or taking stakes in existing companies, which it has not traditionally done.
Circle K Hong Kong currently holds the second-largest market share in Hong Kong, one of the most economically developed markets and densely populated regions in the world, Couche-Tard said. Its major competitor in the region is Japan’s 7-Eleven.
The company has developed expertise in customer loyalty and counts 1.6 million members for its “Ok Stamp it” application, Couche-Tard said. Hong Kong’s population is about 7.5 million.
The Circle K Hong Kong business is small and will not be immediately accretive to earnings for Couche-Tard, according to analysts. Still, it gives the Canadian company immediate market share strength and a starting point to access more opportunities in nearby countries, Desjardins Securities analyst Chris Li said.
“We believe other parts of Southeast Asia (Malaysia, the Philippines and Thailand) also provide an attractive growth opportunity, supported by rising urbanization, growing disposable income, shrinking households and a large young population,” Mr. Li said in a research note.
Still, the purchase is not without risk and perhaps the biggest is political. While Hong Kong is very open commercially, mainland China has different rules, Mr. Hannasch said. “We’re optimistic that the freedoms that private-sector companies enjoy in Hong Kong will continue but there is a risk that the playing field might not be level like in some other parts of Asia.”
Couche-Tard has taken time to understand the political and business dynamics of the Hong Kong market, Mr. Hannasch said. “It’s a risk that we certainly can’t eliminate but we think we understand it,” he said. “We think it’s manageable over a long period of time.”
Hong Kong’s economy is just beginning to climb out from a deep recession sparked by last year’s political protests against rising Chinese influence and made worse by the pandemic. The economy shrank 3.4 per cent in the three months from July to September, its fifth straight quarterly contraction, according to government estimates released in late October.
Revenue at Circle K Hong Kong has stood up well through the turbulence. The company posted same-store sales growth of 5.9 per cent in 2019 and an annualized 5.7 per cent this year over the first six months, according to Couche-Tard.
Couche-Tard will finance the deal with available cash on hand, aiming to close the transaction by the end of the year.
Stock markets reacted positively to news of the deal, with the company’s share closing up 5.5 per cent on the Toronto Stock Exchange Thursday.
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