Alimentation Couche-Tard’s stock could soar if it acquires Suncor’s retail business

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Pumps waiting for a car to refuel at a gas and diesel station.

Written by Joey Frenette at The Motley Fool Canada

Shares of Food Couche-Tard (TSX:ATD) have risen in recent weeks, in part on better-than-expected results and talks that the incredibly liquid company could be in the running for Suncor Energy gas stations at what could be a markdown.

Indeed, hoarding cash lets you feel the full force of the impact of inflation. However, with stock market valuations shrinking as credit becomes harder to come by due to rising interest rates, it is liquidity and strong balance sheets that could separate the haves from the have-nots.

As valuations contract and companies seek to sell retail assets, it’s Couche that could stand a chance of paying three-quarters for a full dollar, so to speak. At the time of writing, the company has over $2.2 billion in cash and cash equivalents, with the ability to make M&A waves in the $10 range.

Without a doubt, it’s been a while since Couche-Tard pulled the trigger on a massive deal. The last big deal he did was from CST Brands. These locations have since been integrated and renamed. Although Couche has been quiet, it’s not for lack of trying.

Management attempted (but ultimately failed) to acquire French grocery company Carrefour in the first half of 2021. The deal was met with skepticism, as Couche-Tard isn’t exactly in the business of generic grocery store. Although it has introduced more fresh foods to its convenience stores in recent years, the proposed tie-up was rather confusing to many.

Petro Canada stores up for grabs

Although Couche-Tard has evolved, it really hasn’t made a big splash. And its cash hoard could swell as the company continues to evolve in a difficult environment. Although Couche has the wherewithal to make a big deal, investors shouldn’t expect it to happen unless all the right boxes are checked. Layer managers did their due diligence and then some before the proposed deals. Their ultimate goal is to create value over the long term.

Looking ahead, Couche looks to be a leader for Suncor’s Petro Canada retail unit. The deal could be in the $10 billion range and help the company leverage its strong liquidity position. According to Bloomberg, there is some overlap between Petro Canada stores and existing Couche-owned stores. This overlap could prove problematic. Additionally, there are anti-trust concerns that can make things difficult.

Couche-Tard is already a dominant force in convenience stores. In any case, do not count on Couche-Tard to run the risk of overpaying the transaction. If there’s no flying to be done, it’s more than fine with a standing pat.

Ultimately, Couche-Tard is a global player, with plenty of room for international mergers and acquisitions. On the contrary, the company may wish to expand into the Asian region to improve its geographic diversification and return on invested capital (ROIC).

At the end of the line

Couche-Tard is in good hands.

The strong balance sheet makes the nearly $60 billion retail giant one of the top bidders for Suncor’s prized retail assets. With an acquisition capacity of more than $10 billion, Couche-Tard could very well be the only realistic buyer. The price will be really tough for smaller rivals like Park fuel justify. To strike a deal, the $5.6 billion Parkland would need to raise astronomical debt. And I don’t think that’s plausible.

From my perspective, Couche could have the bulk of the clout in a potential deal with Petro Canada if federal regulators allow such a deal to happen.

Alimentation Couche-Tard stock could skyrocket if it acquires Suncor’s retail business appeared first on The Motley Fool Canada.

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Fool contributor Joey Frenette holds positions at Alimentation Couche-Tard Inc. The Motley Fool holds positions and recommends Alimentation Couche-Tard Inc.

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