-- Our 'BBB-' long-term corporate credit rating on Alimentation
Couche-Tard Inc. (ACT) remains on CreditWatch with negative implications on
the company's acquisition of Statoil Fuel & Retail ASA, a Scandinavian
convenience store and motor fuel retailer.
-- The debt-funded acquisition will increase ACT's pro forma leverage to
beyond our 3.5x threshold for rating pressure, even after accounting for a
recently announced equity issue.
-- We will resolve the CreditWatch placement once we assess ACT's ability
to reduce fully adjusted leverage to below 3x within the next 18-24 months.
On July 26, Standard & Poor's Ratings Services left its 'BBB-' long-term
corporate credit rating on Alimentation Couche-Tard Inc. (ACT) on
CreditWatch with negative implications, where it was placed April 19, 2012.
The CreditWatch on ACT reflects the financial risk associated with its
recently completed acquisition of Statoil Fuel & Retail ASA, a large
Scandinavian convenience store and motor fuel retailer. On July 24, 2012, ACT
announced a C$300 million equity issue to repay a portion of the US$2.7
billion of debt it incurred to fund the acquisition, although we estimate that
pro forma fully adjusted leverage remains above our 3.5x threshold for
downward rating pressure. We believe that leverage below 3x within 18-24
months from a combination of lower debt and earnings enhancements would be
consistent with an investment-grade rating on ACT.
The acquisition of Statoil strengthens ACT's business risk profile, in
Standard & Poor's view, adding an established, profitable c-store and fuel
retailer with a strong market position in the mature Scandinavian market.
Statoil's stores have strong market shares of about 30% in Sweden, Norway, and
Denmark, with good growth prospects in riskier, more fragmented eastern
European markets. On the other hand, the acquisition and new markets for ACT
introduce some integration risks, which might be offset by ACT's strong track
record in this respect, its decentralized operating structure, as well as the
retention of key Statoil personnel. In addition, Statoil has higher exposure
to fuel sales, margins for which are volatile, but much higher in Scandinavia
than in North America.
ACT has adequate liquidity, with cash balances of US$304 million at April 29,
2012, more than US$800 million available under existing revolving lines of
credit, as well as a three-year US$3.2 billion credit facility for the
acquisition of StatOil. We believe that ACT was comfortably in compliance with
covenants under its financing agreements at April 29, including minimum
fixed-charge coverage and maximum financial leverage tests.
In resolving our CreditWatch, we will assess ACT's ability to reduce fully
adjusted leverage to below 3x within the next 18-24 months. We expect the
debt-financed acquisition increases ACT's financial risk profile,
necessitating more than US$500 million of debt reduction or an offsetting
amount of earnings improvements from synergies to return fully adjusted
leverage to below 3.0x. The two companies' low near-term capital requirements
and track records of free cash flow should enable the combined entity to
reduce debt quickly after closing, although this could be hampered by higher
interest costs and earnings volatility. Offsetting the risk of higher leverage
is Statoil's high degree of real estate ownership, which could present some
options for capital management or to bolster liquidity. ACT's industry-leading
returns on capital will also weaken in the near term, but we expect the
company's strong shareholder orientation to persist, with management's 23%
ownership providing a strong incentive to improve returns.
Related Criteria And Research
-- Key Credit Factors: Business And Financial Risks In The Retail
Industry, Sept. 18, 2008
-- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008
-- Methodology And Assumptions: Standard & Poor's Revises Key Ratios Used
In Global Corporate Ratings Analysis, Dec. 28, 2011
Ratings Remaining On CreditWatch Negative
Alimentation Couche-Tard Inc.
Corporate credit rating BBB-/Watch Neg/--
Complete ratings information is available to subscribers of RatingsDirect on
the Global Credit Portal at www.globalcreditportal.com. All ratings referenced
herein can be found on Standard & Poor's public Web site at
www.standardandpoors.com. Use the Ratings search box located in the left