Alimentation

Couche-Tard

has

The

first

three

debt

instruments

traditionally used a mix of debt and

mentioned above contributed 96.62%

equity to finance its operations. As on

towards

April 27th 2014, ATC had $2,606.40 in

unsecured notes, revolving and non-

long term and short term Debt and the

revolving credit facility has helped the

total equity of firm stood at around

firm to secure funds required for

$3,962.40. These figures give us a

acquisition purposes as and when it

Debt to Equity ratio of 0.66 which

was needed. These are risk free loans

suggests that the firm primarily uses

to the firm which is not backed by any

equity to finance its operations.

security suggesting a good market

Talking about debt, ATC uses several

debt

instruments

to

finance

its

the

reputation.

total

debt.

Revolving

The

credit

mix

facility

gives firm the flexibility to repay the

debts as per convenience. It also

operations, such as:

reduces the financing fees as the

CAD denominated senior unsecured

interest is applicable only on the

notes
USD

amount they have used. The mix gives

term

revolving

unsecured

them a good line of risk free readily

operating

credit
Unsecured

available credit facility which will help

non-revolving

acquisition

credit

facility
NOK floating and fixed rate Bonds
Note Payable
Borrowing
under
bank
overdraft

facilities
Finance leases

the firm acquire more businesses as it

grows further.
Comparing the firms debt structure on
year on year basis, the debt has
reduced by almost 28% in 2014. The
reduction in the debt has helped the
firm reduce the interest expense from

$208 in 2013 to $111 in 2014. The

6.5% respectively. This suggests that

trend has continued in 2015 first three

the firm is generating enough cash

quarters where the firm has managed

from its operations and is able to

to reduce its debt by a considerable

secure loan to finance its business.

$922.0.

From

the

consolidated

months report for 2015, the firm has

managed to payout the acquisition
credit facility debt which was maturing
in June 2015. Different tranches of
notes are maturing in 2017, 2019,
2020, and 2022. Looking at the payout
schedule ACT should manage its cash
in order to make these payments on
time.

During the fiscal year 2014, ACT

repaid an amount of $1,680.0 under
acquisition

credit

facility

using

amounts drawn from operating credit,

unsecured notes and available cash.
This

exercise

repaying

debt

of
has

taking
been

debt
a

for

firms

strategy which we might be risky but

has helped ACT build a very good
credit rating. ACT also repaid $455.0

While the firm has managed to reduce

towards the loan from operating credit

the debt, it has also managed to raise

facility using available cash. If we look

its total equity to a tune of 23% (as

at the interest coverage ratio that

compared

major

indicates how easily a company can

contributors towards the firms total

pay interest expenses on outstanding

equity are the retained earnings at

debts, it has risen to a roaring 131%

$3077.40 and common stock equity

indicating good operational efficiency

at $686.50. For fiscal year 2014, the

and debt management practices.

to

2013).

The

contribution of debt, retained earnings

and common stock equity towards
firms total assets were 25%, 29% and

If we compare the capital structure of

the firm on year on year basis (2014
vs 2013), the debt to equity and debt

ratio has significantly fallen, 41.3%

reduction

and 27.7% respectively. This is also an

various

indicator that ACT is reducing the debt

debt repayments. Looking at

financing as compared to equity in

the strong credit history, the

order to have flexibility. It gives them

slight reduction in cash should

an

debt

not affect the firms ability to

huge

secure debt from any creditors.

option

financing

to
as

go

for

and

heavy

when

acquisition comes along the way.

ACT

has

reported

attributed

to

cash

acquisition

and

The strong financial position of the

revenue

firm has allowed the management to

growth of around 7%. The 2014 figure

reduce the leverage by considerable

stood at $37,956.70. The EBIT of the

margin. The Leverage ratio gives us a

company grew from $839.0 to $1034.0

pretty good picture of reducing debts.

from 2013 to 2014, an impressive

We have already discussed about Debt

23.28% growth. If we look into the

to Equity and Interest coverage ratio

financial

in the previous section. The other

ratios

annual

is

to

ascertain

the

liquidity of the company we find that

I.

Current ratio has gone up from

1.05

to

1.21

reflecting

leverage ratios are

I.

Equity

Multiplier

is

the

measurement of a companys

companys growing ability to

financial leverage. High equity

repay its short term debts.

Quick ratio or acid test has

multiplayer

II.
III.

also gone up from 0.78 to 0.89.

Cash
ratio,
the
most

done through debt. It however

conservative liquidity ratio, has

has decreased from 3.28 to 2.66

gone down from 0.21 to 0.19, a

from

decline

decrease of equity multiplier

suggests

that

larger portion of financing is

of

8.5%.

The

cash

2013

to

2014.

The

proves

II.

that

is

Alimentation Couche-Tard Inc. has two

capitalizing on its strong cash

classes of common shares: Class A

flows

Multiple Voting Shares and Class B

to

the

reduce

firm

debt

for

financing its business.

Capitalization ratio which is the

Subordinate

Voting

Shares.

ACT

doesnt have any preferred shares.

ratio of long term debt and sum
Class A is mainly held by founders and
of

long

term

debt

and
certain institutional investors. Class B

shareholders equity has also

is normally the most traded since it is
come down by 18% from 2013
held

by

greater

number

of

to 2014.
shareholders. Each Class A carries 10
All these ratios is pointing to a healthy

votes and each Class B carries one

capital structure wherein the company

vote.(

is reducing its leverage and relying on

tard.com/en/qa/ )

From

http://corpo.couche-

its growing operating cash flows to

Looking at the shareholder structure
finance its operations.
for

ACT,

there

are

major

shareholders with no one owning more

than 10% of the shares. They are FMR
LLC (8.56%), Capital Research and
Management Company (3.40%) and
RBC global asset management Inc
(1.64%). The rest of the shareholders
own less than 1% of the companys
shares.
Common Stocks Ownership Structure

(from

http://quote.morningstar.ca/Quicktakes

/owners/MajorShareholders.aspx?

proposed plans. At the same time, any

t=ATD.B&region=CAN&culture=en-CA)

change in the price of the stock will

affect them the most, with any loss or

Implications

gain having the bigger effect on them

Usually, the purpose of the super
voting shares is to give key company
insiders

greater

control

over

the

company's voting rights, and thus its

board

and

corporate

actions.

The

existence of super voting shares can

also be an effective defense against

compared

to

other

shareholders.

Issuing different classes of shares can

also be used as a prevention against
hostile takeovers, since key insiders
can maintain majority voting control of
their company without actually owning
more than half of it.

hostile takeovers, since key insiders

(from

can maintain majority voting control of

their company without actually owning
more

than

half

of

the

(from

http://www.investopedia.com/ask/answ
ers/05/070405.asp#ixzz3ZwR3s8s7

In general, the purpose of the super

voting shares is to give key company
insiders

greater

control

over

the

company's voting rights. The owners

of these shares can also gain more
premium over other shares, and they
have bigger say when it comes to
companys decisions, which means
that they can approve or reject the

http://www.investopedia.com/ask/answ
ers/05/070405.asp#ixzz3ZwR3s8s7
Last

but

investors

not

least,

usually

the

dont

foreign
consider

investing in Canadian companies with

dual-class shares, a legacy that John
Coffee, of Columbia University's law
school

in

New

York,

warns

could

handicap Canada's capital markets..

(

from

http://www.theglobeandmail.com/repo
rt-on-business/industry-news/the-law-

page/not-all-shares-are-created-

return. The risk free rate of return was

equal/article1212060/)

6.15% during the same period. The

Calculating Weighted Average Cost of

Beta on the asset as mentioned earlier

is 0.018. The Cost of Equity hence

Capital

comes out to be 6.52%.

To calculate the WACC we have used
the latest 2015, 3 quarter data. ATC

Cost of Debt

has two listings of common stock-

To calculate the cost of debt, we have

ATD.A

the

divided the interest paid during the 3

565,987,517.

quarters with the total long term debt.

The total market value of ATC as on

This comes out to be 4.21%. The long

12th May 2015 is $26,218.00. (ATD.A

term debt is considered at the book

trading price was $47.15 and ATD.B

value for this calculation. The income

trading price was $46.03).

tax rate is 29.03% for the year 2015

and

ATD.B.

outstanding share is

Together

From the latest figures the weights of

debt and equity stands at 5.97% and

and the after tax Cost of Debt comes

out to be 2.97%.

94.03% respectively.

WACC

Cost of Equity

Using the data gathered above, the

To calculate cost of equity we have

taken average annual return figures
from

1957-2011.

The

Canadian

common stocks during this period

gave a return of 10.45%. This will be
considered as the market rate of

WACC for the firm sits at 6.31%. The

WACC suggests that average cost of
financing required by ACT is quite low.
It also indicates that firm is able to
create value as it does not have to
bear the high borrowing cost.

Loblaw: The top Competitor

ACT edges out its rival by a small

Loblaw Companies Limited is one of

the major competitor of Alimentation
Couche-Tard. It is one of the largest
retailers

in

Canada

and

provides

grocery, pharmacy, health and beauty,

apparel,

general

merchandise,

banking, and wireless mobile products

and

other

services.

Although

the

business model of Loblaw is more

margin. The Price to Book value of the

Loblaw is lower than the Couche-Tard
which could mean that something is
fundamentally

wrong

with

the

company. The Price to Earning ratio

also suggests that for each dollar of
earning, investors have to spend much
more on Loblaw than ACT for same
amount of earning.

diverse, its strong presence in retail

However if we look at the operations

sector in Canada makes it a top

of both the companies the Couche-

competitor of ACT. Loblaw has also

Tard is at much better position than

recently acquired Shoppers Drug Mart,

the Loblaw. ACT edges past Lobalw in

along with the powerful Life Brand and

terms of better inventory turnover

Optimum brand, which resonates with

ratio, better asset turnover ratio and

the growth strategy of ACT. The similar

better net receivables turnover flow

approaches to the business is one

which

other reason why we thing it a suitable

efficiency

comparison company.

capital structure of the two companies

Both the companies are quite similar

in terms of their annual sales and
gross margins and in both the cases

show
at

better
ACT.

operational

Comparing

the

we find that ACT is better positioned in

terms of leverage. The D/E ratio of
Loblaw is higher than ACT suggesting
that the company uses debt to finance

its operations.

The

Debt Ratio of

already

established

chain,

ACT

Loblaw is 0.35 which is still higher

eliminates the issue of lack luster

than ACT. Also the interest coverage

infrastructure. ACT allows these chains

ratio of Loblaw is way lower than the

to operate in their own brand name

ACT, indicating low operating income

ensuring the local acceptance. But

as compared to interest expense. From

with

the financial ratio we find that the

amalgamation might become an issue.

Loblaw is currently facing few issues

Also being a major seller of tobacco

as the cash ratio has dropped by more

products, ACT is vulnerable to changes

than

in government regulations. Although

62%.

concerns for

This

raises

Loblaw.

liquidity

(Please

refer

an

such

aggressive

unforeseen

strategy,

circumstance,

appendix to find more comparison

must

ratios)

market for other products and ensure

At

the

current

struggling

stage

with

its

Loblaw

is

operational

inefficiency1 which can be attributed

to firms management structure and
poor back end infrastructure. Due to
this Loblaw is not able to maintain a
competitive
products.

price

Poor

point

assimilation

for
of

its
IT

infrastructure is also a concern for

them. Comparing these issues with
Couche-Tard, the latter is in a better
position. With a strategy of acquiring

concentrate

on

ACT

developing

the growth in the long run.

Capital Restructuring
The present leverage ratios suggest
that

Couche-Tard

have

enough

flexibility to increase its debt without

having any adverse effect on the
firms going concern. If we look at the
9 months consolidated statement of
2015, we find that debt to equity is at
0.42 which is way lower than D/E of
Loblaw (0.91). If the ACT matches the
D/E of Loblaw, they can raise extra

$2000 through debt. This although

combination of both equity and debt

increases the risk for the company, it

that maximizes not only earnings but

allows ACT to amass the cash reserve

also stock price. This is best realized

to payout the debt which are maturing

by

in near future.

WACC. So by increasing debt we are

With increase in leverage the ROE

capital

structure

that

reduces

able to achieve both the objectives.

increases ideally because the use of

With the current credit history of the

leverage increases stock volatility and

ACT, it shouldnt be difficult for the

with increasing level of risk, return

firm to raise that amount of debt. Also

also increases.

the improving operational cash flow

The value of the firm increases by

$586.00. This is because with increase
in debt we get a benefit of tax shied
savings. This overall helps ACT to
regain a portion of the tax.

should give enough incentive to the

firm to secure debt.
Final Recommendation
We

see

that

the

optimal

capital

structure is the one that reduces

By increasing the D/E ratio to 0.90, we

WACC. By increasing debt we are able

are

to

allowing

ACT

to

amass

cash

achieve

this

target.

We

would

reserve that can be used to buy back

recommend ACT to increase its debt in

the equity. Although ACTs interest

order to gain from the tax shield but

expense will increase, by buying back

also

shares it can improve the ROE and

financing. ACT should not for debt

Earning per share.

With increase in

ratio as high as Loblaw as it increases

debt the WACC will decrease. An

the risk, it should consider moderately

optimal

increasing the debt to a tune of 55-

capital

structure

is

some

maintain

balanced

equity

60% from current 25%. This will allow

the firm to maintain the cash ratio
which can be used to repay all the
maturing debts in the near future. This
will also increase the ROE and hence
will keep the shareholders happy and
company

profitable.

Appendix
1. http://www.financialpost.com/story.html?id=65573c81-1600-48e0-88fb8ca878b8c87c&k=0

Value of Unlevered Company

VU = EBIT * (1-Tc)/RU
where RU = Unlevered cost of capital, Tc = Tax rate
VU = 1137 * (1 - .293)/0.0482 = $ 16,677.57

2.

Value of Company at current debt level

VL = VU + (D*Tc)
where D = debt, Tc = Tax rate
VL = $ 16,677.57 + $1,664 * 0.293 = $ 17,16.12
Value of Company at proposed debt level
VL = VU + (D*Tc)
where D = debt, Tc = Tax rate
VL = $ 16,677.57 + $3,664 * 0.293 = $ 17,751.12