TEXT-S&P affirms Alimentation Couche-Tard 'BBB-' rating

Mon Oct 1, 2012 12:45pm EDT

Overview
     -- We are affirming our 'BBB-' long-term corporate credit rating on 
Alimentation Couche-Tard Inc. (ACT) after the company completed the 
acquisition of Statoil Fuel & Retail ASA, a Scandinavian convenience store and 
motor fuel retailer.
     -- We are removing the rating from CreditWatch, where it was placed with 
negative implications April 19, 2012.
     -- We estimate that the recent equity issuance of C$345 million to repay 
acquisition debt will bring pro forma leverage down to about 3.5x, and that 
that solid free cash flow in the next 12-18 months should enable the company 
to reduce leverage to below 3x by the end of 2013.
     -- The stable outlook reflects our view that ACT's strong market 
positions and its continued operating efficiency will insulate it from margin 
pressure, resulting in leverage declining quickly to about 3x by the end of 
2013.

Rating Action
On Oct. 1, 2012, Standard & Poor's Ratings Services affirmed its 'BBB-' 
long-term corporate credit rating on Quebec-based Alimentation Couche-Tard 
Inc. (ACT). The outlook is stable. Standard & Poor's removed the rating from 
CreditWatch, where it was placed with negative implications April 19, 2012.

The affirmation and CreditWatch removal follow the company's completion of the 
acquisition of Statoil Fuel & Retail ASA, a Scandinavian convenience store and 
motor fuel retailer.

Rationale
The ratings on ACT reflect Standard & Poor's view of the company's position as 
a leader in the fragmented and competitive convenience store (c-store) 
industry in North America, as well as in the more concentrated Scandinavian 
market; its solid profitability and cash flow; and its intermediate financial 
risk profile. On the other hand, the company's financial risk profile is 
exposed to periodically high leverage as it grows through acquisitions, which 
could be compounded by some earnings instability associated with volatile 
gasoline prices.

ACT is the second-largest independent c-store operator in North America with 
about 5,700 locations, although this accounts for less than 4% of the 
industry's stores. The July 2012 acquisition of Statoil adds about 2,300 
stores in Scandinavia. We believe the Statoil acquisition strengthens the 
company's business risk profile by adding an established, profitable c-store 
and fuel retailer with a strong market share of more than 30% in the mature 
markets of Sweden, Norway, and Denmark with good growth prospects in riskier, 
more fragmented Eastern Europe. The industry in North America has high 
fragmentation and has low barriers to entry, but ACT enjoys one of the 
strongest positions, enhanced by the brand equity of its banners, the quality 
of its real estate, and efficiencies stemming from the breadth of its 
operations. The company's relatively attractive position in North America and 
Scandinavia, solid merchandising, and proven track record of integrating 
acquisitions all contribute to returns on capital that rank among the highest 
for food retailers in North America.

ACT's store network--which spans all Canadian provinces, 42 U.S. states, 
Scandinavia, and Eastern Europe--continues to expand organically and through 
tuck-in acquisitions, even after the Statoil acquisition. As such, we believe 
that the company could increase its exposure to volatile fuel prices as it 
continues to acquire retail operations from major oil companies. We estimate 
that motor fuel will continue accounting for about two-thirds of ACT's 
combined revenues with Statoil, which contributes to revenue volatility, but 
in-store merchandise and services generate about two-thirds of gross profit 
and more stable core earnings. Also, fuel margins are much higher in 
Scandinavia than in North America. The Statoil acquisition and new markets for 
ACT introduce some integration risks, which might be offset by the company's 
strong track record in this respect, its decentralized operating structure, as 
well as the retention of key Statoil personnel.

Given the industry's fragmented nature, acquisitions are the growth vehicle of 
choice for established c-store operators. Standard & Poor's believes that ACT 
will continue playing an active role within the industry's consolidation, as 
demonstrated by the Statoil transaction and ACT's 2010 unsolicited bid for 
Casey's General Stores Inc. (not rated). We expect the company will continue 
targeting small and midsize acquisitions to widen its geographic reach, in 
addition to larger acquisitions from large oil companies divesting their 
noncore branded retail outlets. Having said that, we expect ACT to maintain 
its financial discipline as it acquires, which has contributed to its strong 
historical return on capital and investment-grade rating.

Elevated debt levels from the acquisition, after accounting for the recent 
C$345 million equity issue, contribute to estimated pro forma leverage of 
about 3.5x, which is high for the rating. That said, our conservative US$1.4 
billion estimate of combined EBITDA for fiscal 2013 (ending April 2013) should 
yield about US$1.1 billion of funds from operations and more than US$400 
million of free cash flow in the next 12 months, which we believe enables ACT 
to reduce debt quickly, lowering our fully adjusted leverage to about 3x by 
the end of 2013. The strength of the company's cash flow is better 
demonstrated by its long-standing track record of reported free cash flow, 
even through periods of elevated capital spending.

We believe that higher financial risk stemming from management's willingness 
to increase leverage for acquisitions is mitigated by its disciplined 
approach--as demonstrated by the unsuccessful bid for Casey's in 2010 and 
resistance to a higher bid for Statoil. Although ACT's credit protection 
metrics will fluctuate because of acquisitions and variations in gasoline 
prices, Standard & Poor's believes that the risk of a sharp increase in debt 
for a major acquisition is reduced somewhat because of the dearth of large 
targets.

Liquidity
We view ACT's liquidity as strong. At July 22, 2012, the company had more than 
US$500 million in cash and US$913 million available under its operating credit 
facilities, augmented by US$305 million of proceeds from its recent equity 
issue. We base our liquidity assessment on the following key parameters:
     -- Liquidity sources (including cash, discretionary cash flow, and 
availability under its revolving credit facility) will exceed uses at least 
1.5x through 2013.
     -- Liquidity sources will continue to exceed uses, even if EBITDA were to 
decline by 30% in 2012 and 2013.
     -- We estimate that steady earnings and restrained capital expenditures 
should contribute to annual run-rate free cash flow of at least C$400 million, 
much of which will be allocated to debt reduction in the next 12-18 months.
     -- There are no meaningful debt maturities until ACT's US$3.2 billion 
acquisition credit facility matures in 2015.
     -- The company has good relationships with its banks and a solid standing 
in capital markets.

Outlook
The stable outlook reflects our view that ACT's strong market position in 
North America and Scandinavia and its continued operating efficiency will 
insulate it from margin pressure in this highly competitive industry, 
contributing incremental earnings and generating strong free cash flow for 
debt reduction that should result in leverage declining quickly to about 3x by 
the end of 2013. Beyond then, we expect the company to sustain credit measures 
that are consistent with its intermediate financial risk profile, 
characterized by fully adjusted debt to EBITDA of 2.5x-3.0x, funds from 
operations to debt of more than 25%, and EBITDA interest coverage of more than 
5.0x. As such, we believe management's financial discipline in expanding by 
acquisition will be a key factor in maintaining the investment-grade rating.

Considering its strategic orientation of growing through acquisition, ACT has 
some latitude at the rating for periodically elevated leverage, but we believe 
that negative rating pressure would emerge if a transaction caused fully 
adjusted debt to EBITDA to exceed 3.5x with risky prospects for a return to 
below 3.0x. Moreover, the rating would be under pressure if increased 
competition caused weaker earnings, particularly from merchandise and 
services, keeping debt to EBITDA above 3x.

Related Criteria And Research
     -- Methodology And Assumptions: Standard & Poor's Revises Key Ratios Used 
In Global Corporate Ratings Analysis, Dec. 28, 2011
     -- Key Credit Factors: Business And Financial Risks In The Retail 
Industry, Sept. 18, 2008
     -- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008

Ratings List
Ratings Affirmed And Removed From CreditWatch Negative
                                        To                 From
Alimentation Couche-Tard Inc.
 Corporate credit rating                BBB-/Stable/--     BBB-/Watch Neg/--


Complete ratings information is available to subscribers of RatingsDirect on 
the Global Credit Portal at www.globalcreditportal.com. All ratings affected 
by this rating action can be found on Standard & Poor's public Web site at 
www.standardandpoors.com. Use the Ratings search box located in the left 
column.
Comments (0)
This discussion is now closed. We welcome comments on our articles for a limited period after their publication.

A tourist takes a plunge as she swims at Ngapali Beach, a popular tourist site, in the Thandwe township of the Rakhine state, October 6, 2013. Picture taken October 6, 2013. REUTERS/Soe Zeya Tun (MYANMAR - Tags: SOCIETY) - RTR3FOI0

Where do you want to go?

We look at when to take trips, budget considerations and the popularity of multigenerational family travel.   Video