Circle K On The Run

This week's transaction between two convenience store heavyweights is stirring widespread speculation, while the companies remain relatively mum about many of the specifics.

With the acquisition of 43 ExxonMobil On the Run stores in the Greater Phoenix market, coupled with the assumption of franchised contracts covering some 450 On the Run stores, Alimentation Couche-Tard Inc., North America's second largest c-store chain, has further strengthened its positioning in a critical market while at the same time apparently renewing interest in what has been a dormant part of their business.

"It's an interesting deal," said one official familiar with Couche-Tard who spoke on condition of anonymity. The official suspects the rise of QuikTrip in the Phoenix market may have contributed to Couche-Tard's pursuit of the 43 company-operated sites. (Click here to view this week's CSPTV report on QuikTrip's rise in Greater Phoenix.) "I know they feel the heat of QuikTrip," the official said. "Couche-Tard probably wanted to lock up some of the good sites through this purchase and block others from being able to buy this real estate." On Tuesday, Couche-Tard, operator of more than 5,400 c-stores in North America and recognized as one of the premier acquisition-driven chains in the convenience channel, said it had entered into an agreement with ExxonMobil to pick up 43 company-owned On the Run sites, including the real estate in 33 of the sites.

In addition, in a move that surprised analysts and industry observers, Couche-Tard also agreed to take control of franchise agreements for 450 additional locations. That move marks the first major franchise initiative since Couche-Tard lost its biggest Circle K franchisee in 2006 when Susser Holdings Corp. allowed its franchise agreement to expire on 320 Circle K stores in Texas and Oklahoma. Susser converted those stores to its proprietary Stripes brand.

In the aftermath of the Couche-Tard-ExxonMobil deal, numerous questions remain: * How much did Couche-Tard pay? That answer likely won't be known till Couche-Tard releases its quarterly figures later this summer. Some observers, using multiples estimate that the Quebec-based chain paid between $70 million and $100 million.

* What are Couche-Tard's plans for the 450 franchised locations? The deal doubles Couche-Tard's U.S. franchised holdings. Officials familiar with the company's franchise portfolio estimate that it generates a relatively small annual sum, perhaps $5 million to $6 million before this week's acquisition. "Will they keep the On the Run brand? Will they let the contracts expire and look to buy those locations or convert them to a franchised Circle K? There are a lot of questions still out there," said the official familiar with the retailer. While a breakdown of the sites has not yet been released, Couche-Tard said the franchised sites cover 28 states mostly east of the Mississippi.

* Are Couche-Tard and ExxonMobil working on additional deals? In June 2008, ExxonMobil began a large shift from direct retail to the distributor class of trade, a move that would result in the divestment of 820 company-owned stores and 1,400 dealer-operated sites. The pace of divestitures has crawled, with the Couche-Tard deal representing the first substantial selloff. "We continually assess our business operations and the opportunities for growth, restructuring and divestment depending on the fit with our overall strategic marketing objectives," Kristen Hellmer, an ExxonMobil spokesperson, told CSP Daily News.

What is clear is the deal moved quickly. "Everyone was aware that Exxon Mobil was on the way to sell their market," Couche-Tard's vice president and CFO Raymond Pare told CSP Daily News. "We have regular discussions with potential sellers. Somewhere through the process, one mentions to the other that he was ready to discuss, and that's it. That's a process that started weeks ago, I will say one or two months ago, and we're there now." Pare acknowledged that this deal is a bit different from the norm in that it involves a substantial franchise network, as opposed to a company-operated model. "Even if the franchise side on a contribution basis will be a lot smaller than the other, for our franchise group, it is a very good opportunity," he noted.

LEO Vercollone, CEO of 20-unit VERC Enterprises in Duxbury, Mass., is building his first franchised On the Run location. He was hesitant to draw any conclusions about the deal, but does have a lot of questions.

"The information we got was very limited, so I think there's a lot of questions to be answered," he told CSP Daily News. "It would be one thing if you were being bought by a company that you didn't know anything about, but Circle K is a major player and Mobil's a major player." Referring to his pending first On the Run store, Vercollone added, "I would like to have more, but that was before all this went down. And I don't know if this has changed anything. I've been with Mobil for 35 years, and it's a company I've been able to grow and develop with."

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