MONTREAL - Alimentation Couche-Tard is expected to make a play to expand its already large U.S. presence after Hess Corp. moved Wednesday to spin off or sell its retail convenience store network, the fifth-largest in the United States.
In a filing with the U.S. securities regulator, the oil company said it will either distribute the business to shareholders in a tax-free spin-off or sell the business.
"Following receipt of any such offers, the Hess Corp. board of directors will determine which alternative it believes best serves the long-term interests of all Hess Corp. stockholders," the company said in a news release.
A spin-off would see the retail company become an independently run publicly traded company listed on the New York Stock Exchange.
Hess is the largest owner of convenience stores along the U.S. east coast, with operations in 15 states and Washington, D.C. As of Sept. 30, it operated 1,258 stores, including 81 travel plazas and 1,177 convenience stores. Its largest markets are North Carolina, Florida and New York. It also has 96 locations operated by franchisees.
The sale has been eagerly anticipated since the New York-based company announced last year it would close or sell its refineries and divest its retail business to focus on oil production and exploration. The company has been making changes to avert a proxy fight with Elliott Management, its second-largest shareholder.
Couche-Tard chief financial officer Raymond Pare declined to comment on a possible bid for Hess, but said in an email that the company has "the capacity to do any transaction with our strong balance sheet."
Analyst Derek Dley of Canaccord Genuity says Couche-Tard (TSX:ATD.B) can financially support a deal in the US$1.5 billion range after reducing its debt from the $3.6-billion cash and debt purchase of Europe's Statoil Fuel and Retail.
He says Hess would be very attractive and help to bolster its presence in the U.S. Northeast, where it operates Circle K stores.
"When assets like this come up for sale, which isn't very often, you need to be opportunistic," he said from Vancouver.
But Dley said he expects there will be many Hess suitors and that Couche-Tard will live up to its reputation of not chasing an acquisition or of overpaying.
Analyst Peter Sklar of BMO Capital Markets said Couche-Tard's interest in Hess would be consistent with the consolidation of the North American convenience store industry.
"We believe this is a potential positive development for Alimentation Couche-Tard," he wrote in a research note.
In June, Sklar said the acquisition of Hess's retail operations would increase Couche-Tard's earnings by as much as 69 cents per share as of fiscal 2016, assuming a US$2-billion purchase price.
Hess claims to be the largest player on the U.S. East Coast, operating primarily in densely populated areas with above-average fuel margins and household incomes greater than the national average. Its bannders include Hess, Hess Express and Wilco Travel Plaza brands.
It is the largest Dunkin' Donut franchisee with more than 650 sites and has franchise relationships with Wendy's, Dairy Queen and Bojangles at travel plazas it operates.
It is also the largest Dunkin' Donut franchisee with more than 650 sites and has franchise relationships with other such as Wendy's and Dairy Queen.
Hess said an independent retail operations would buy 75 to 80 per cent of its fuel from third parties under long-term contracts, with the rest purchased on spot markets.
Despite the presence of large players like Couche-Tard, 7-Eleven and the Pantry, the U.S. convenience store industry is highly fragmented with about 60 per cent of the market comprised of companies with less than 100 sites. It also faces growing competition from supermarkets and club stores like Costco that sell fuel.
Hess has 14,600 employees, including 8,600 people who work full-time and 500 working at its corporate and field offices. Its unionized employees work under three collective agreements.
The company earned US$28.5 million of US$9 billion of revenues in 2012. It ended 2013 by buying out its joint venture partner WilcoHess, which operates 353 stores and 37 plazas. The combined operations earned US$35 million on US$9.8 billion of revenues for the nine months ended Sept. 30.
Alimentation Couche-Tard is one of North America's largest convenience store operators with 6,207 locations and more than 60,000 employees operating under the Couche-Tard, Mac's and Circle K brands. In Europe, it operates 2,276 Statoil Fuel & Retail stores across Scandinavia, Poland, the Baltics and Russia, with 18,500 employees.
For its full financial year, Couche-Tard earned US$572.8 million or $3.07 per diluted share on revenue of $25.54 billion.
On the Toronto Stock Exchange, its shares were down $2.40 or 2.91 per cent at C$80 in afternoon trading Wednesday.