Caltex investors say Couche-Tard’s revised bid still falls short

PERRY WILLIAMS

SENIOR BUSINESS WRITER

NOVEMBER 26, 2019

The Australian

Canadian convenience store giant Couche-Tard may be forced to raise its $8.6bn takeover bid for Caltex after shareholders raised concerns the offer price undervalued the company amid a parallel move by the fuels retailer to boost returns to investors.

Caltex’s board is weighing the merits of an improved $34.50 a share offer lobbed by Couche-Tard on November 18 after previously rejecting a $32 bid tabled on October 11. Caltex shares soared 13.43 per cent to $33.79, just shy of the offer price.

Couche-Tard — which jostles with 7-Eleven as one of the world’s biggest convenience players — revealed late Tuesday it had acquired a 2 per cent stake in Caltex.

It also outlined a plan to axe the fuel retailer’s proposed spin-off of its property sites should its bid succeed, potentially derailing Caltex’s plan announced on Monday to pursue a property float in order to boost capital returns to shareholders. However, early reaction from Caltex shareholders suggests the Canadian suitor should be prepared to boost its bid to win support from key institutional investors. The Sydney-based company plans to speak with investors this week to gauge their response to the offer.

Caltex shareholder Touchstone Asset Management rubbished the takeover tilt as vastly undervaluing the company.

The Bennelong Funds Management-backed Touchstone said a further premium would need to be paid for it to win control.

“While we always welcome corporate interest, a takeover bid has to be fair, and reflect a full control premium — the recent bid from Alimentation Couche-Tard Inc does not,” Touchstone investment director Jack Chemello said.

“Plenty of work has been done over time that establishes control premiums are typically around the 30 per cent level, this one is barely half that.”

Couche-Tard first approached Caltex with a $32 a share offer on October 11, representing a 25 per cent premium on the previous day’s share price, which was rejected by Caltex’s board.

A hike to $34.50 a share was then tabled to the fuels retailer on November 18 and subsequently disclosed to the market on Tuesday. The offer was pitched at a 15.8 per cent premium to Monday’s closing share price.

Couche-Tard chief executive Brian Hannasch is understood to have visited Sydney from his Montreal base and held meetings with Caltex’s board earlier in November alongside deal adviser Goldman Sachs.

A second major Caltex investor also told The Australian the “early feeling” was that a higher premium needed to be baked in.

“There will be plenty of shareholders like us who are prepared to wait on the sidelines and see how this plays out. But the price as it stands does look a little thin.”

Any bid needed to take into account the unrealised value in Caltex’s balance sheet, Touchstone added. “Right now Caltex is trading at a very substantial discount to its intrinsic value — shareholders need only look at the balance sheet to realise that. Hence we would expect suitors also take that fact into account when making takeover offers, assuming they wish to succeed,” Mr Chemello said.

Amid speculation it may look to offload parts of Caltex’s lucrative fuels and infrastructure division, the Canadian suitor said it was a “committed buyer” of the entire business and had been eyeing deals in the Asia-Pacific market for several years.

“With Caltex, we see a potential opportunity to leverage our leading global position in the convenience retail market, and we would seek to bring all our operating expertise to bear to help support and grow the Caltex business,” Mr Hannasch said.

“Importantly for Caltex’s customers, partners and staff, we are a committed buyer of the entire Caltex business. We are willing and prepared to engage with Caltex to enable or our Proposal to be put to Caltex shareholders as soon as possible”.

It also detailed plans for a special dividend as a way of unlocking Caltex’s chunky $850m franking credits balance or a buyback alternative which would add extra value for some shareholders.

Broker RBC Capital Markets said a bump in the bid would probably be needed to get a deal over the line.

“We think that the bid price from ACT is in the ballpark although a small bump may be needed to push a deal over the line as a matter of principle,” RBC analyst Ben Wilson said.

The $34.50 price implies a 9.6 times enterprise value/EBITDA multiple based on full year 2020 forecasts, RBC estimates, while its own $32 share price target is based on a 9 times multiple.

Caltex shareholders may be wary of losing out on “future upside”, equities research firm MST Marquee said.

“As far as we are concerned there is still a shed load of value on the table for potential suitors, so we would most certainly not rule out a bid for Caltex,” MST energy analyst Mark Samter said in a note released before the takeover approach was confirmed.

Couche-Tard operates 16,000 retail fuel sites globally in its home market of Canada as well as America and Europe and also 2250 international sites under the global Circle K brand.