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Couche-Tard Lays Hostile Path for Casey's General Acquisition

ANKENY, Iowa -- An unsolicited proposal that began last year by Alimentation Couche-Tard Inc. to purchase Ankeny, Iowa-based Casey's General Stores Inc. could turn into a hostile takeover. After the Midwestern convenience store retailer's board of directors repeatedly rejected the offer, the Canadian c-store retailer is now reaching out to Casey's shareholders for support in its effort.

Early Friday, Couche-Tard made public a letter to Casey's President and CEO Robert J. Myers, dated April 9, which reiterated the offer -- $36 per share, totaling $1.9 billion -- and said the Laval, Quebec-based company was "compelled to make this proposal known to your shareholders," as Casey's was unwilling to engage in negotiations. On news of the proposal, Casey's shares jumped 22 percent, or $6.92, in Friday morning trading to $38.51.

In a response letter released later that morning, Myers wrote to Couche-Tard President and CEO Alain Bouchard, saying he was "very disappointed that you have decided to launch a hostile public campaign," and called the offer "significantly undervalued" and "not in the best interests of the corporation."

"Given our consistent outperformance among convenience store operators and our ongoing growth initiatives, along with the fact we own virtually all of our real estate, your proposal vastly undervalues Casey's and our future prospects," Myers wrote to Bouchard. He also called the timing of the proposal "very opportunistic given the impact of the recession and recent severe weather within [Casey's] marketing territory."

A call to Casey's more for information was unreturned by press time.

Analysts contacted by CSNews Online agreed with Myers sentiments. Morgan Keegan analyst Ben Brownlow said the offer was undervalued. "When you look at multiples and where the industry has been over the past two to three years, it has been a difficult operating environment, which leads to lower valuation multiples," he told CSNews Online. "That's why Couche-Tard is making this bid. Historically, Casey's comparable store sales have been in the mid- to single-digits within the store since 2005 to late 2009. So I think this is opportunistic."

Brownlow added that Couche-Tard will have to raise its price. "The market feels it is worth north of $36, and the initial proposal hasn't changes since October," he said.

A source close to the matter told CSNews Online Couche-Tard is committed to its $36-per-share offer, and while the company doesn't want to go down the road to a proxy fight and hostile takeover, it will do so if deemed necessary. The source pointed to a statement in the letter to Myer, which said: "If you continue to refuse to engage in meaningful negotiations, we are prepared to submit our proposal directly to your shareholders and commence a proxy contest to replace your board of directors."

The all-cash proposal to buy all outstanding shares of Casey's common stock represents a 14 percent premium over Casey's closing price of $31.59 per share on April 8, 2010, Couche-Tard stated. The transaction totals approximately $1.9 billion on a fully diluted basis, including Casey's net debt of approximately $29 million.

Brent Rystrom, analyst with Feltl and Co. in Minneapolis, estimated a peak private valuation for Casey's would fall in the $38.50 to $41 a share range, according to published reports. "[Couche-Tard] might have to make an offer in excess of US$41 to actually close a deal," he said.

Todd Vingers, a portfolio manager with Lee Munder Capital Group also shares this opinion. "[It] seems like a lowball offer, so I'm not sure if their strategy is to play the negotiation game and pay a higher price later on, or if they're just throwing this out there to see if Casey's will bite," he told the Financial Post. "If a higher price comes in I do think Casey's will consider it more seriously, but $36 is not going to do it."

Bill Chisholm, a retail analyst at MacDougall, MacDougall and MacTier in Toronto, told Reuters the current offer is a "very good deal."

"If they could get it at $36, I think it would be a very good deal. Casey's is a very good business," he said in the report, adding he predicts the proposal will be drawn out. "I think Couche-Tard is determined and they will make their bid. If no other players come to the game, they might be successful."

In his letter, Casey's Myers cited public statements where Couche-Tard executives have described U.S. convenience store operators as undervalued, and said the 14 percent premium on the share price is an indication that the company is trying to acquire Casey's "on the cheap."

"We agree with you that the U.S. convenience store operators are currently undervalued; however, we will not hand over to you the significant long-term value of Casey's that rightly belongs to our shareholders," he noted.

According to the April 9 letter written by Bouchard, initial attempts to engage in negotiations with Casey's began in October 2009, but Casey's board of directors unanimously rejected the offer "without the benefit of discussing our proposal with us or our advisors." Additional letters were sent March 9 and March 30. With Casey's cooperation, Bouchard said a definitive agreement could be reached within two to three weeks.

Couche-Tard has retained Credit Suisse Securities (USA) LLC as its financial advisor and Dewey & LeBoeuf LLP as its legal counsel. Innisfree M&A Inc. was retained as its proxy solicitor.

Midwest Boom for Couche-Tard
If the transaction were to be approved by Casey's shareholders, Couche-Tard would significantly increase its presence in several Midwestern states thanks to Casey's 1,500 locations.

View a map of Couche-Tard and Casey's market overlap provided by TDLinx.

"Couche-Tard does not have a significant presence in the Midwest, and Casey's has a very strong presence in smaller, rural locations across the Midwest," Morgan Keegan's Brownlow told CSNews Online. "It would dramatically increase [Couche-Tard's] footprint. There's not a lot of opportunity to improve the merchandise offer, but I think [Couche-Tard] looks at it as a low multiple opportunity to increases buying power and increase its footprint in Midwest."

Illinois, for example, would add 374 former Casey's stores to its current 187 Circle Ks, according to TDLinx data. But Couche-Tard's biggest gains would be in Iowa, where it would add 426 former Casey's to its paltry three Circle K stores.

Such a move would also mark the entrance of Couche-Tard into several new states, such as Kansas (109 Casey's), Minnesota (96), Nebraska (98), South Dakota (37), and Wisconsin (10), where the Canadian-based retailer currently has no stores whatsoever, according to TDLinx.
Couche-Tard would also significantly expand its presence in Missouri, adding 294 units to its existing 60 Circle Ks, as well as Indiana, adding 65 former Casey's to its 140 Circle Ks -- the only common state where Circle Ks outnumber Casey's.
Overall, the acquisition would place Couche-Tard in every state in the mainland United States, except the upper Midwestern states of Idaho, Montana, Wyoming, Utah and North Dakota.
Bouchard indicated his interest in the chain in the letter to Myers. He wrote: "We have an extremely high regard for your operations, management and talented employees. Our operations are highly decentralized and we have a track record of keeping most of the existing management and employees in place as we did in the Circle K acquisition and our other transactions."

Casey's Path for Growth
Casey's has seen same-store sales increases in its in-store categories for all of fiscal 2009, along with all quarters to date in 2010. Most recently, the third quarter saw same-store sales grow 1.7 percent in grocery and other merchandise.

A highly disciplined and diligent approach to investments and business have resulted in the chain's positive performance despite the tough economy, Convenience Store News reported in its March 22, 2010 issue.

Several initiatives are in place to continue its growth path, including the launch of a new store design that spans 3,700 square feet -- roughly 1,000 square feet larger than its traditional stores -- and was designed to increase gross-profit dollars by driving traffic to the higher-margin, faster-moving products in the stores, such as packaged beverages and prepared foods, CSNews reported.

"We are seeing increased revenues and increased cash flow from these stores above and beyond our older store designs," Chief Financial Officer Bill Walljasper said in the report.

The new store design features a centrally placed checkout, which makes room for an expanded cooler section. Half of the added square footage is dedicated to foodservice, including a new made-to-order sandwich program and expanded coffee offering.
In fiscal 2010, Casey's plans to build between 17 and 20 newly designed stores, while replacing an additional 20 sites with the new look.

Meanwhile, Casey's is developing a new remodel program to be put in place in fiscal 2011 that incorporates the expanded cooler space, made-to-order sandwich program and expanded coffee program.

Walljasper also told CSNews that growth in fiscal 2010 will be weighted more toward acquisitions. "We are focused on keeping that pipeline full at all times," he said. While looking for opportunities in its existing markets, Casey's is stretching its eye to bordering states of Arkansas, Tennessee, Michigan and North Dakota.

"The convenience industry has its pressures like any other industry. We feel them and so do other operators. The sum of these pressures has people rethinking whether they want to stay in this business," Walljasper told CSNews. "When we look at the [acquisition] activity this year vs. a year ago, it's certainly more robust, and we're cautiously optimistic about the momentum continuing."

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