Alimentation Couche-Tard (ATDBCN: Baa1 / BBB+) Makes offer to 7-11 Parent Seven & i (A2/A)

Couple of updates - all supportive of €ATD curve. We see full debt funded acquisition putting it at Baa2 Neg ratings for now and we expect co will put together a deleveraging path to hold onto IG ratings. That leaves us seeing value on the €26s at Z+80/B+105/3.6% and some on the 31s at Z+130/B+165 - both regardless of the outcome and based on current market commentary which points to a number of hurdles co needs to get through.

1. S&P says this was consistent with ATD's strategy to achieve $10b EBITDA by FY28 (current $5.6b, pro-forma $13b). We'd only add co clearly has acquisitive nature (including deals that did not go through in past) - an aside for investors they will need to sit through similar situations again. Couche mgmt will point to a near doubling in size under a decade while lifting margins 200bps higher - impressive feat. S&P goes on to say full debt funded would move leverage over 5x - we agree. As we said 1-turn is ~circa $13b vs. equity value for Seven and i of $34b. That implies 2.6x turns of leverage - we'll round to 3x for a takeover premium. Added onto the base low 2x leverage that both run standalone, we are left with low 5x. Combined entity would generate FCF of ~$4b/yr pre. synergies.
2. Separate to ATDBCN, for $ investors in 7/11 (SVELEV; Baa2/A) S&P has noted 36% of shareholders are now overseas (Feb 2024) which is applying pressure for management reforms. It sees this as part of the driver for target leverage increasing to 1.8x-2.5x in FY25 (from <1.8x) - it was 2.6x levered to end FY23 and targeting 2.3x to end this year.
3. FT doing a write up on the regulation headwinds this deal will face. As we mentioned 7-11 (including speedway banner) is no.1 in US connivence store market share, Couche-Tard (under Circle-K banner) is no. 2. It's quoted a person close to top US regulators saying "It’s still early to make an assessment as we don’t have an agreed deal but you can expect this deal to get challenged". Consensus is shifting towards election not moving the US's hard stance on M&A and as we've noted with TPR, Trump's VP elect - JD Vance - has made positive comments in the past on the head of FTC and antitrust crusader Lina Khan.

   Article also flags concerns from Japanese M&A lawyers who point to their Foreign Trade Act. It's finally quoted bankers close to seven & i saying feasibility of takeover was low considering above. Lawyers/regulators are saying divestitures of existing stores could help get the deal done - Couche announcing acquisition of 270 stores under the GetGo Cafe & Markets banner yesterday (again in US) is not indicative of that being considered yet.

4. Seven & i equities reversed -11% yesterday leaving it ~10% above pre-takeover announcement. On back-of the hand that's <1/3 chance priced in. Read-through on the deal has gone as far as currency strategist looking for Yen upside, see here.