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Overheated U.S. market to force Couche-Tard into overseas acquisitions: analysts

MONTREAL - Alimentation Couche-Tard is expected to focus on growing its overseas convenience store network because of the high cost of expanding in an overheated acquisition market in the United States, industry analysts say.

The chain has grown aggressively over its 34-year history — its transformation from a Quebec company to a convenience store powerhouse fuelled by the addition of Ontario' Mac's in 1999, Circle K of the U.S. in 2003 and Scandinavia's Statoil Fuel and Retail in 2012.

But along the way it has developed a reputation for not overpaying.

As a result, the emergence of new consolidators willing to pay top dollar in the fragmented U.S. market may be forcing the company to shift its focus, analysts say.

Energy Transfer Partners and Marathon Petroleum recently paid high earnings multiples to acquire U.S. stores from Susser and Hess respectively.

Derek Dley of Canaccord Genuity said Couche-Tard (TSX:ATD.B) was interested in both assets but unwilling to pay so dearly.

"We believe the company remains active on the acquisition front; however, Couche-Tard's focus is likely centred on European acquisitions which have recently traded at far more reasonable multiples," he wrote in a report ahead of the retailer's fourth-quarter and full-year results, which come out on Monday.

Couche-Tard was Canada's fourth-largest company by revenue last year behind first-place Suncor Energy (TSX:SU). Revenues are expected to increase 6.3 per cent to US$37.8 billion for the 2014 fiscal year when adjusted profits are forecast to be $1.38 per share, up from $1.11 a year earlier, according to analysts polled by Thomson Reuters.

For the fourth quarter, it is expected to earn 25 cents per share in adjusted profits on US$8.62 billion of revenues, up from 20 cents per share on US$8.78 billion of sales a year earlier.

Perry Caicco of CIBC World Markets sees a number of possible European acquisition opportunities since more than half of gas station retail operations are still owned by oil companies. U.S. oil companies began to sell these stores a decade ago but the trend is now increasing in Europe with sales by Delek, Neste Oil, Exxon Mobil and Shell.

"It is not unlikely that Alimentation Couche-Tard will be a player as transactions unfold and may have particular interest in stations in Italy and Scandinavia," he wrote, adding that Russia's Lukoil and large supermarket operators may be bidding rivals.

Analyst Keith Howlett of Desjardins Capital Markets said opportunities may also be available in Canada. He expects Shell, Chevron and Imperial Oil to sell more retail stores in Canada. But it will likely have competition from Parkland Fuel Corp., CST Brands (NYSE:CST) and Sobey's parent company Empire Company Ltd. (TSX:EMP.A).

Howlett said Couche-Tard has recently made reference to acquisition potential in Asia. But he also suggested that partnerships with a major grocery chain in the U.S. could present Couche-Tard a new avenue for consolidation. Currently, the large players in this segment include Murphy Oil which operates Walmart fuel sites, Kroger and Safeway.

"There may be an opportunity for a credible and experienced operator such as Couche-Tard to enter into a long-term partnership arrangement to operate the fuel stations of a supermarket chain," he added, noting that Couche-Tard has partnership experience with Shell in Chicago and Irving Oil in the U.S. northeast.

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