Alimentation Couche-Tard, the Canadian convenience store operator best known in the U.S. for its Circle K branded gas station and store locations, is reportedly emerging as the top bidder for CST Brands (CST) . The target has been on the block since March when it said it hired Bank of America Merrill Lynch and JP Morgan Chase to launch a strategic review.
The Wall Street Journal reported late Monday that Couche-Tard is nearing a deal for San Antonio-based CST, and that the parties could announce a transaction as early as this week.
The news comes as no surprise to industry bankers, who told The Deal, a sister publication of TheStreet, in December that several companies were eyeing CST well before it hit the block in March, including Couche-Tard and Marathon Petroleum (MPC) - Get Report, the owner of gas station convenience store operator Speedway.
Since then, Seven & I Holdings, the Japanese parent of 7-Eleven Inc., also has been thought to be involved in the bidding, industry sources told TheStreet recently, since the company walked away with a package of about 80 of CST's California stores in May. 7-Eleven paid $408 million, a substantial premium for CST's California assets given recent industry multiples, according to two industry bankers who requested anonymity.
Energy Transfer Partners' (ETP) wholly-owned gas station arm Sunoco Inc.-- not to be confused with the parent's publicly traded master limited partnership Sunoco(SUN) - Get Report -- was also thought to be a likely suitor but sources have since Sunoco's parent might have too many issues of its own right now to be a competitive bidder.
Stopping short of confirming Monday's report, one industry banker familiar with the situation told TheStreet that the CST auction was in the late rounds of bidding in recent weeks, and was awaiting final bids. The source reaffirmed the belief that Couche-Tard is a logical fit for CST and that it has expressed interest in acquiring the business.
CST is, however, what another industry banker described as a "big bite" for Couche-Tard in the U.S. space. This person wonders if the buyer has a U.S. partner behind the deal, or if it is considering splitting the target's assets into separate Canadian and U.S. operations.
This would make sense, according to the first industry source, who said a number of potential bidders, which this person declined to name, walked away from a deal for CST due to its Canadian assets. The industry banker said one party in particular did not want to be involved in the target's Canadian operations due to the differences between the regulatory schemes in the country compared to the U.S.
Still, both sources have said a deal for the target is imminent, and Couche-Tard may be the best fit regardless of the price, given it's presence in Canada. Furthermore, other likely bidders, like Marathon and Sunoco, might be hard-pressed to pay a premium for CST, the first source said, if the new owner would be forced to abide by a purchase agreement the target may have signed with refiner Valero Energy (VLO) - Get Report when it spun CST off in 2013.
This person was uncertain the terms of that agreement but believed CST signed either a 10-year or 15-year petroleum products purchase agreement with it's former parent, which would inhibit refiners like Marathon from capitalizing on cost-saving synergies, such as the sale of its Texas refinery products through CST locations.
Sources did not seek to speculate on a valuation for CST Brands, but industry analysts have said the target could fetch a price as high as $50 per share, or $3.75 billion, while activist investor Engine Capital LP, which in part pushed CST to launch a strategic review in March, has said the company could be worth more than $4 billion.
The target's market value has not yet reached either mark, however, despite shares trading up more than 6% to around $47.15 Tuesday. The $3.65 billion market cap company would be Couche-Tard's largest acquisition this decade, according to The Deal's records.
Moreover, it would come on the heels of the buyer's $1.3 billion acquisition of Imperial Oil's (IMO) - Get Report Ontario and Quebec retail stations announced in March. Still, the company, which boasted a C$35 billion ($27 billion) market cap Tuesday as shares climbed more than 2% Tuesday to about C$61.50, has momentum behind it with its recent streak of consolidation. And more importantly, it may make the most sense among those who have been thought to be eyeing the business.
Couche-Tard and CST Brands did not respond to requests for comment Tuesday.