The reputation of Alimentation Couche-Tard as a disciplined investor suggests the acquisitive Canadian convenience retailer will think long and hard whether it will sweeten its $8.6 billion offer for Australian target Caltex.

While Caltex on Tuesday pushed the door half-open for its suitor, Couche-Tard – French for “night owl” – is still considering whether its offer of access to “selected non-public information” will allow it to take the matter further, far less raise its tentative $34.50 a share offer as suggested by the Sydney-based player.

Still, the fast-growing owner of the Circle K brand, which is well known in parts of Asia and North America, has made its appetite clear for Caltex, with chief executive Brian Hannasch describing it as a “potential springboard” to expand in the massive Asia-Pacific market.

It has shown it is serious by building a 2 per cent stake in Caltex in recent months, worth about $172 million at the current share price.

While an unknown name in Australia, Couche-Tard has built a vast network of more than 16,000 convenience stores around the world, starting from a sole store opened in 1980 in Laval, Quebec, by now-billionaire Canadian businessman Alain Bouchard.

After posting record net earnings of $C1.8 billion ($2 billion) last financial year, it has an ambitious target to double the size of the business again by 2023.

“I have always thought that in our industry size matters, whether that be for purchasing, logistics, best practices or for becoming famous for our product categories,”  Mr Bouchard was quoted as saying when Couche-Tard made its last big acquisition, of Texas-based CST Brands for $US4.4 billion, including debt, in 2016.

But at an enterprise value of about $10 billion, Caltex would be Couche-Tard’s biggest ever acquisition, after some 60 M&A deals completed since 2004 that have added 10,200 stores globally.

Couche-Tard is used to entering new geographies, as demonstrated by its $US2.8 billion acquisition of Norway’s Statoil Fuel & Retail in 2012, which launched it into Scandinavia.

But buying Caltex would also extend Couche-Tard well beyond its business comfort zone of convenience stores and fuel stations, into oil refining, fuels trading and importing.

“Investors [in Couche-Tard] may be concerned about the year-to-date depressed earnings from Caltex’s overall business, as well as Couche-Tard acquiring assets beyond convenience stores and gas stations,” BMO Capital Markets analyst Peter Sklar  said in a note after Caltex on Monday deemed the offer inadequate but said it was open to a higher price.

BMO, which has an “outperform” call on Couche-Tard stock, estimates that based on Caltex’s 2018 earnings and an offer price of $34.50 a share, Couche-Tard could see earnings growth of C12¢ a share, or 7.7 per cent.

“If Couche-Tard were to acquire Caltex at a reasonable multiple, express its plans for the non-retail assets, and provide a road map for earnings to return to previous levels, we believe this acquisition could result in multiple expansion for ACT, as the company has been communicating an Asia-Pacific strategy to investors for the past few years,” Mr Sklar said.

He pointed to Caltex as a “platform acquisition” for a third leg of growth for the Canadian retailer after North America and Europe.

RBC Dominion Securities analyst Irene Nattel said she expects Couche-Tard to “remain disciplined on price paid”, noting it typically looks for accretion in earnings before interest, tax, depreciation and amortisation of 35 to 50 per cent from cost synergies alone, which in Caltex’s case would likely exclude the refinery business.

“Strategically, a potential acquisition of Caltex would be consistent with [Couche-Tard’s] five-year plan to double the size of the company through a combination of strong organic performance and acquisitions, and management’s commentary on the attractiveness of the Australian market,” Ms Nattel said, adding she wasn’t surprised Caltex was seeking a richer offer and deeming it possible that Couche-Tard could raise its bid.

“Based on conversations with management, Australian c-store [convenience store] networks are compelling due to a well-developed fuels industry, while generally undermanaged inside store operations.”

Several brokers in Canada have raised their price targets for Toronto-listed Couche-Tard’s stock since the approach to Caltex was revealed early last week, suggesting that at the current price at least, they see value in the takeover.

Meanwhile, Caltex chief executive Julian Segal and his senior management team are expected to use an investor briefing in Sydney on Thursday to give a fuller explanation of the company’s position on the takeover approach.

They are also expected to detail the initiatives they already have in mind to unlock value in the company, in particular from Caltex’s $830 million pile of franking credits.

And management should also reveal more on the retail property initial public offer – announced less than 24 hours before Caltex confirmed the Couche-Tard approach.

The convenience retailing revamp is also likely to be a focus.

Shares in Caltex dipped 0.6 per cent to $34.30 on Wednesday after starting last week south of $28. The stock gained 7 per cent on the news of the petrol station site spin-off, then another 13 per cent on the bid interest.

“There’s probably a sweeter offer to come from [Couche-Tard],” Bell Direct market analyst Jessica Amir said in a report.

She calculated Caltex’s enterprise value-to-EBITDA ratio at 8.7 times, leaving it “undervalued” compared to peer Viva Energy, which is trading at 9.3 times.

Extracted from AFR