Breakingviews

LONDON (Reuters Breakingviews) – Canada’s petrol pump giant may struggle to pull off its cheeky grocery raid. Quebec-based Alimentation Couche-Tard is plotting a tie-up with European supermarket chain Carrefour. It’s a deal that may be driven more by the French group’s depressed share price, and the acquirer’s desire to diversify than any industrial logic. Convincing the target’s shareholders will be the hard part.

The takeover talks were a surprise. On Tuesday evening, the $37 billion Couche-Tard, which operates 14,000 convenience stores and petrol stations mostly in North America, said it was in friendly talks with Europe’s largest retailer, which is famous for hypermarkets, not small outlets.

There’s a precedent: Britain’s petrol station group EG Group recently acquired supermarket chain Asda from Walmart. However, the lack of geographic and business overlap suggests Couche-Tard is looking for a hedge in case the electric vehicle boom reduces demand for its gas stations. Carrefour may also appeal for its price: prior to the offer it was valued at a lowly 3 times 2021 EBITDA, including debt, according to data from Refinitiv.

Even at Carrefour’s depressed price, Couche-Tard Chief Executive Brian Hannasch will struggle to pay too big a premium. Assume he offers around 20 euros per share or 16.2 billion euros, as reported by Bloomberg, equal to a 30% premium. Before factoring in any synergies, which are likely to be modest, the petrol station giant would make a 7.4% return on the 23 billion euro outlay including debt by 2022, Breakingviews calculations using Refinitiv forecasts show. That’s below Carrefour’s 8% cost of capital, according to Morningstar.

Hannasch might be willing to stretch. Couche-Tard could raise around $10 billion of debt before hitting its desired limit, according to analysts at UBS. Top shareholder Caisse de Depot et Placement du Quebec might pump in fresh equity if more cash was needed to seal the deal.

Yet Carrefour’s long-suffering shareholders, which include Bernard Arnault and the Moulin family will need some convincing. Before Wednesday, Carrefour shares had lost nearly 40% in the past five years, as its home grocery market has become more competitive. However, Chief Executive Alexandre Bompard’s turnaround plan is starting to pay off, with operating profit finally set to rise for the next three years, Refinitiv forecasts show. France will likely demand a high price to give up its national champion to Quebec now.