Casey's Unveils $500M Recapitalization, Fending off Couche-Tard Takeover
ANKENY, Iowa -- Casey's General StoresInc.'s board yesterday unanimously approved a $500 million recapitalization plan for the convenience retailer, and reaffirmed its strategy to continue to follow its growth plan.
The recapitalization plan will be executed through a modified "Dutch auction" self-tender offer for up to $500 million of the company's common stock at a price of $38 to $40 per share, and will be funded by a combination of debt financing and available cash.
Casey's said it believes this recapitalization plan:
• Will generate significant value for Casey's shareholders;
• Will be highly accretive to its diluted earnings per share at all prices in the offer range;
• Will allow shareholders to continue participating in the company's substantial upside; and
• Is financially prudent given the company's strong balance sheet and careful use of capital.
Casey's President and CEO Robert J. Myers said the recapitalization plan will generate significant value and enhanced returns for shareholders, while allowing the retailer to continue executing on its strategic growth initiatives. "The Casey's board believes our stock is meaningfully undervalued at recent trading levels and that the company is underleveraged given Casey's strong balance sheet and consistent cash flow," said Myers.
"The repurchase of approximately 25 percent of Casey's outstanding shares in this highly accretive transaction is very compelling," he continued. "Moreover, we are excited about our prospects and our ability to significantly grow our footprint, and expand our new store design and offerings across our store base to drive additional shareholder value."
Casey's also announced yesterday that its board unanimously recommends against Alimentation Couche-Tard Inc.'s revised tender offer to acquire Casey's for $36.75 per common share.
The convenience store chain described the newest offer as substantially undervaluing Casey's and not in the best interests of the company, its shareholders and other constituencies. As such, Casey's filed an amended Schedule 14D-9 with the Securities and Exchange Commission (SEC) yesterday, detailing the reasons for its recommendation against Couche-Tard's offer.
"After careful evaluation, the Casey's board unanimously recommends that our shareholders do not tender their shares into Couche-Tard's inadequate $36.75 per share offer. Our plan to repurchase a substantial portion of Casey's shares enables us to acquire approximately 25 percent of the best operator in the convenience store sector -- Casey's -- at a very attractive price," Myers stated. "On the contrary, Couche-Tard does not believe in the true value of Casey's, as evidenced by its CEO's comment in [the company's] 2010 Annual Report: 'When speculators moved [Casey's] stock above $38 on the day of announcement, we simply knew at that time that we would not be buyers at that level...'"
Myers concluded: "The bottom line is that Casey's shareholders will receive far more value from our accretive recapitalization plan and the substantial future upside of our growing company than through Couche-Tard's inadequate, self-serving offer."
Couche-Tard -- the Canadian c-store giant that owns the Circle K brand in the U.S. -- has set an Aug. 6 deadline for Casey's shareholders to tender to its $1.9 billion offer to take over the 1,500-store chain. Last Thursday, the Montreal-area company increased its hostile takeover bid by 75 cents per share to $36.75 cash per Casey's share -- an improvement of around 2 percent over Couche-Tard's initial bid this spring.
The offer is subject to a number of conditions, including the removal of roadblocks that Casey's put in place to hamper Couche-Tard's takeover efforts.
Casey's board believes it will have no trouble obtaining financing for its recapitalization plan at attractive rates due to its strong business and careful use of capital. The board doesn't anticipate that the recapitalization will interfere with the chain's ability to pursue its strategic growth plan. Casey's also said it has no plans to change its quarterly dividend, which was recently increased to 10 cents per share, and will have post-capitalization debt levels that compare favorably to other companies in its business sector.
In Casey's 14D-9, filed yesterday, the company outlined some additional details to support its recommendation against the revised Couche-Tard offer. In the filing, management claims "Casey's industry-leading performance, significant growth opportunities, strong balance sheet and exceptional management and employees can create far greater value for shareholders than is reflected in the Couche-Tard offer. This value will be further enhanced by the recapitalization plan announced today. The Casey's board believes that Couche-Tard's $36.75 per share offer undervalues the company and is an attempt to take the substantial current and future value at Casey's that rightly belongs to Casey's shareholders."
Management additionally claimed Couche-Tard's offer does not take into account Casey's strong recent performance and continuing momentum. According to the company's filing:
• Casey's fiscal 2010 performance and year-to-date results underscore the company's strong future prospects. Casey's reported a record fiscal 2010 and expects to build on its positive momentum in 2011. The retailer increased its fiscal 2010 earnings per share (EPS) 36 percent over the previous fiscal year and "maintained its industry-leading margins."
• Research analysts that cover Casey's included in the Reuters consensus estimates have increased their EPS estimates for Casey's by an average of 11 percent since April 8, 2010, the day before Couche-Tard first made its proposal public.
• Casey's impressive performance has continued into fiscal 2011, as evidenced by its strong June same-store sales results amidst a still challenging economic environment and one of the wettest Junes on record in its marketing region. Casey's reported both strong gas volume increases and above-goal gas margins for the June period, as well as positive inside same-store sales growth and a strong customer count.
• Casey's inside same-store sales performance has been positive for 26 consecutive quarters, averaging 5.9 percent for the five fiscal years ended April 30, 2010, vs. the convenience store peer average of 3.5 percent for the comparable fiscal period. The company expects inside same-store sales growth to trend favorably over the remainder of the 2011 fiscal year.
• Casey's stock price has consistently outperformed its peer group and the broader market. In the three-year period prior to the public announcement of the Couche-Tard offer, Casey's stock increased 24 percent while the convenience store peer group experienced an average decrease of 46 percent, and the S&P 500 decreased 18 percent.
In addition, Casey's noted it is continuing to seize significant growth opportunities, including the expansion of its business and geographic footprint through strategic acquisitions and new store openings; improved store economics from its new store design; store replacement and remodel program; and its proven ability to successfully implement price increases.
Casey's business model is focused on developing a loyal customer base among predominantly smaller communities, as well as the strength and stability of its high-margin proprietary prepared food program and the efficiencies from its unique and strategically complementary self-distribution system, according to the company.
Moreover, Casey's management pointed out in the filing that the retailer is widely recognized as a best-in-class operator, supported by its industry-leading inside-sales margins, double-digit annual EPS growth over the five fiscal years ended April 30, 2010, and track record of returning value to shareholders through a dividend that has increased at a compounded annual growth rate of 17.3 percent over the past five fiscal years.
Casey's goes on the accuse Couche-Tard of trying to buy U.S. companies "on the cheap." As Couche-Tard's CFO has said: 'It's just good for the M&A environment. It's exactly what we did not have in the past two years that didn't allow us to be able to close good deals.' (National Post, March 10, 2010). Despite receiving a low tender count in its original offer and the continued strength of Casey's business, Couche-Tard only raised its offer by 75 cents. The Couche-Tard offer represents a low control premium -- 16 percent to Casey's closing stock price the day before Couche-Tard publicly disclosed its original proposal on April 9, 2010 and only a slight increase over Couche-Tard's original offer, which represented a premium of 14 percent, the company said in its filing.
Additionally, Casey's accused Couche-Tard of making misleading statements and engaging in questionable behavior regarding its offer and Casey's. Some examples, according to Casey's:
• In an effort to imply a higher control premium than is truly represented in its revised offer, Couche-Tard has claimed that, absent its original offer, Casey's stock would have declined along with the S&P 500 Index and the S&P Retail Index. In fact, Casey's stock price has consistently outperformed both indexes on a historical basis, and its U.S. sector peers have also outperformed both indexes since Couche-Tard made its original proposal public on April 9, 2010.
• Couche-Tard continues to inaccurately portray the trailing EBITDA multiple implied by its offer. The acquisition multiple implied in the $36.75 per share offer remains unchanged at 7.0x LTM EBITDA, not 7.2x LTM EBITDA as claimed by Couche-Tard. Couche-Tard inaccurately stated that the EBITDA multiple of its original offer was 7.4x.
• As previously announced, Casey's has filed a complaint against Couche-Tard alleging a market manipulation scheme perpetrated by Couche-Tard in an attempt to acquire all outstanding shares of Casey's stock at an artificially deflated price. As described in the complaint, shortly after Couche-Tard made public its offer of $36 per share on April 9, Couche-Tard sold almost all of its Casey's shares (approximately 3.9 percent of the issued shares of Casey's) at an average price of $38.43 per share -- reaping millions of dollars of profit by trading on the market's reaction to its own announcement and artificially depressing the run-up in Casey's stock price that otherwise would have followed Couche-Tard's announcement of its takeover bid.
• Couche-Tard has also mischaracterized the employment agreements for Casey's management and board. The facts are that all of the change-of-control agreements with Myers and the other officers were entered into years before Couche-Tard made its offer, and the recent updates were not prompted by the Couche-Tard offer. Secondly, the new employment agreement with Myers, which replaced his existing agreement, was entered into to extend the term of Myers' employment with Casey's. The new employment agreement was not prompted by Couche-Tard's offer, and in fact the terms of the agreement were under discussion prior to Couche-Tard making any offer for Casey's. The changes in the other agreements with the officers were made in response to federal tax law changes under IRC Section 409A (allowing severance payments to be withheld until six months following termination), and to provide that severance payments are triggered upon the occurrence of a change in control rather than the shareholder approval of a change in control. Thirdly, the dollar amounts of the severance packages did not change. The change-of-control provisions in the amended agreements are no more favorable to the officers, including Myers, than the terms in their then-existing agreements.
Details of the Recapitalization Casey's will commence a modified self-tender offer for up to $500 million of its common stock at a price of $38 to $40 per share. The minimum price of the offer reflects a 4.1-percent premium over the closing price of $36.50 on July 27, 2010, the last full trading day prior to the announcement. The offer is expected to commence today, July 29, and therefore would expire on Aug. 25, at midnight EST, unless extended.
If the number of shares tendered at or below the determined per share price totals more than $500 million, Casey's will purchase shares tendered at or below the determined price on a pro-rata basis, as will be specified in the offer to purchase that will be distributed to shareholders.
Based on the number of shares tendered and the prices specified by the tendering shareholders, the company will determine the lowest price per share within the range at which Casey's can purchase up to $500 million of its common stock or such lesser number of shares as are properly tendered and not properly withdrawn.
All common shares purchased by the company will be purchased at the same price. If the offer is fully subscribed, then $500 million of common stock will be repurchased, representing approximately 24.5 percent to 25.8 percent of the 50.97 million shares outstanding as of July 23, 2010. Specific instructions and an explanation of the terms and conditions of the offer are being mailed to Casey's shareholders. TheoOffer is subject to the completion of the debt financing, as well as other customary conditions, according to the c-store retailer.
Casey's directors and executive officers have advised the company that they do not intend to tender any of their shares in the offer.
MacKenzie Partners will serve as information agent for the tender offer. Goldman, Sachs & Co. is acting as financial advisor to Casey's, while Cravath, Swaine & Moore LLP and Ahlers & Cooney, PC are providing legal advice.