O Canada

Canada-based convenience retailer Couche-Tard made a conditional, non-binding bid for Caltex Australia at $34.50 per share, which has since been rejected by Caltex on the basis that it undervalues the company. This follows an earlier proposal from Couche-Tard of $32.00 per share, which was also rejected.


After the latest rejection, Caltex has offered non-exclusive access to selected non-public information to Couche-Tard to enable it to formulate a revised proposal.


Couche-Tard is a Quebec-based company, founded by Alain Bouchard in 1980, and has a market capitalisation of US$36bn. It owns more than 13,000 service station and convenience store sites around the globe, with its primary brand being Circle K.


The conditions of the offer include: due diligence; organising necessary financing; no material asset sales, divestments or similar transactions; obtaining Foreign Investment Review Board (FIRB) approval; and a unanimous recommendation by the Caltex and Couche-Tard boards.


Notwithstanding Caltex’s view on what constitutes a sufficiently attractive price, the biggest obstacle to the offer proceeding may be winning federal government approval via the FIRB. This is due to the irreplaceable network of Caltex’s strategically important infrastructure and terminal assets, such as 1) the Kurnell terminal in Sydney with its deep-water access and pipelines to the airport, western Sydney and Newcastle, and 2) the Lytton refinery in Brisbane, one of only four remaining in the country.


Importantly, the Couche-Tard offer would permit a special dividend to be paid, allowing Caltex to distribute the $800m in franking credits it held as at 30 June, or around $3.20 a share.


Complicating the issue is Caltex’s planned spin-off of its freehold service station and retail sites. The spin-off would see Caltex sell off a 49% interest in 250 core convenience retail sites. The sites would be placed in a property trust, and Caltex would then enter into long-term lease agreements over each site. Rental payments would be $80–100m in the first year, with completion of the IPO in the first half of calendar 2020.


We value the property IPO at around $1.9bn, based on a 4.75% capitalisation rate, with $704m in post-tax proceeds for Caltex.


We have downgraded our recommendation to Hold from Accumulate, based on valuation, while our target price has increased to $32.00 from $27.00.