Alimentation Couche-Tard Inc.'s 2010 attempt to buy U.S. chain Casey's General Stores Inc. collapsed when it simply wouldn't offer enough cash to entice Casey's shareholders to sell.
I'm not here to say a similar fate will befall its deal to buy The Pantry, another regional U.S. chain. But there's evidence that some folks think the price isn't yet right. And that has important implications for the Couche-Tard shareholders who have bid up the stock in eager anticipation of the company expanding its profits with this new, sizable deal.
First, let's make clear some key differences. The Casey's bid was unsolicited, rejected by Casey's and accompanied by a failed proxy battle to add directors to Casey's board. By contrast, The Pantry's board has approved the Couche-Tard offer, which a report in The Wall Street Journal said came after The Pantry solicited bids from potential suitors.
The price of $36.75 (U.S.) cash for each Pantry share was a premium of 27 per cent to its Dec. 16 closing price, the last day before that Wall Street Journal story revealed the company could be sold. It's also a 39-per-cent premium to the 30-day average price leading up to Dec. 16.
It caps a great couple of years for Pantry shareholders, who have seen their stock triple since the beginning of 2013. Analyst Karen Short of Deutsche Bank calls the sale "an extremely favourable outcome for shareholders."
That might not be the last word, however.
Set aside the flurry of announcements from law firms that have announced "investigations" into The Pantry's board for, in the words of one, "the insufficient consideration that Pantry shareholders are expected to receive." After all, these firms flock to nearly any deal announcement.
Instead, let's begin by noting Pantry shares have traded above the $36.75 offer price every day since Christmas Eve. Shares of a target in an all-cash acquisition usually trade a bit below the announced price, reflecting some degree of uncertainty a deal will close. Trading above a deal price suggests there are at least some folks out there betting on a higher offer.
One of those investors may be the famed Mario Gabelli, who tweeted on the morning of Dec. 18 that the $36.75 represented an "opening bid." Starting on that day, Mr. Gabelli's various funds have more than doubled its ownership stake in The Pantry, buying nearly 700,000 shares, according to U.S. securities filings. Mr. Gabelli's funds now own more than 5 per cent of the company.
It could be chalked up to "merger arbitrage," the practice of benefiting from moves in the stock of a buyer and its target. Except that strategy works better in stock-for-stock deals – and, by my calculations, Mr. Gabelli only stands to make a return of less than 1 per cent on his recent purchases if the $36.75 sale price goes through.
Is Couche-Tard getting a steal? Well, even with the premium, The Pantry is trading at the lowest multiples of in the convenience-store sector, an enterprise value of just a little over seven times its EBITDA, or earnings before interest, taxes, depreciation and amortization, versus Couche-Tard's mark of nearly 13. (Data from Standard & Poor's CapitalIQ.)
To RBC Dominion Securities analyst Irene Nattel, who covers both companies, it's about right. "Pantry is the least evolved of the major industry players in terms of its technology platform, food-service strategy, and in-store mix, and it has a relatively leveraged balance sheet," she says in a note. "With a new management team, a complementary footprint, opportunity for synergies, and implementation of best practices, we may see accelerating earnings growth from The Pantry network under the [Couche-Tard] umbrella."
The deal prompted Ms. Nattel and other analysts to raise their target prices on Couche-Tard; the average is now $49.54 (Canadian), versus Monday's close of $47. This suggests investors are already paying for a lot of benefit from this deal getting done at this price.
Ms. Short of Deutsche Bank says that The Pantry and Couche-Tard have such similar business models (such as in the use of branded gasoline), that there may not be any other strategic buyer that makes as much sense. And it makes it even less likely that financial buyers, who snapped up a number of underperforming companies in 2014 in hopes of cutting costs, can offer up a better bid.
The best bet, then, may be for Couche-Tard to get its Pantry deal done. Given Couche-Tard's history of walking away from the wrong price, it's probable it will close at $36.75 (U.S.). But there seems to be room for a wager that The Pantry will fetch a higher price.