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