Alimentation Couche-Tard, Inc. -- Moody's affirms Alimentation Couche-Tard's Baa2 rating, outlook remains stable

Rating Action: Moody's affirms Alimentation Couche-Tard's Baa2 rating, outlook remains stableGlobal Credit Research - 15 Dec 2021Toronto, December 15, 2021 -- Moody's Investors Service ("Moody's") has affirmed Alimentation Couche-Tard, Inc. (ACT) Baa2 long-term senior unsecured rating. The outlook remains stable."The affirmation of ACT's Baa2 rating reflects the company's good operational track record and strong free cash flow generation that has allowed the business to reduce leverage to historical lows. However, it incorporates our expectation that the company will continue to look for sizable debt funded acquisitions that will re-leverage its balance sheet" says Louis Ko, a Moody's VP - Senior Analyst.Affirmations:..Issuer: Alimentation Couche-Tard, Inc.....Senior Unsecured Regular Bond/Debenture, Affirmed Baa2Outlook Actions:..Issuer: Alimentation Couche-Tard, Inc.....Outlook, Remains StableRATINGS RATIONALEACT's leverage (adjusted debt/EBITDA) has declined over the last three and half years to 1.9x for the last twelve months to October 10, 2021 (LTM Oct 2021) from 3.2x (fiscal year ending April 2018), primarily driven by EBITDA growth, both organically and from acquisitions. The conservative balance sheet places the company in a strong position to pursue large transformational debt funded acquisitions. While the company was unsuccessful with its offers to acquire Carrefour S.A. (Baa1 stable) for around $20 billion at the beginning of 2021 and Ampol Limited (previously Caltex) for $5.6 billion in 2019, it demonstrates ACT's appetite for large acquisitions as well as business segments outside its core offering. Management have indicated it has around $10 billion of debt capacity to pursue acquisitions but will do so in a disciplined manner.ACT's rating benefits from: (1) its very large scale as a convenience store/gas station operator with revenue over $50 billion; (2) strong market positions in Canada, US and Scandinavia, defended with its well-recognized Circle K and Couche-Tard banners; (3) disciplined cost management and operating track record and demonstrated ability to integrate new acquisitions; (4) strong history of generating positive free cash flow (around $1.5 billion annually) with which to de-lever after closing large debt funded acquisitions; and (5) our expectation that leverage (adjusted Debt/EBITDA) will be around 2x through the next 12-18 months absent any major acquisition (1.9x for LTM Oct 2021).However, ACT's rating is constrained by: (1) its acquisition growth orientation, which elevates leverage to 3-4x periodically; (2) a large portion of merchandise and service segment revenue driven by tobacco, for which growth has been limited; (3) an appetite to branch out into a new business segment; and (4) our expectation that fuel demand will decline gradually over time as fuel efficiency improves and electric vehicle penetration increases.We expect ACT to maintain a strong liquidity profile, with sources in excess of $7.0 billion while it does not have any mandatory debt repayments for fiscal 2022 and 2023 (ending April). The company's liquidity sources consist of balance sheet cash of $3.4 billion at October 10, 2021, annual free cash flow of at least $1.5 billion, and full availability under its $2.5 billion unsecured credit facility that matures in May 2026. We expect good headroom under ACT's leverage and interest coverage covenants (more than 30% cushion). We assess ACT's refinancing risk over time to be low. The company's annual free cash flow and its balance sheet cash should be able to take out each year's debt maturities should there be stress in the debt market.ACT is exposed to notable environmental risks as fuel consumption is expected to decline steadily in Canada, US and Europe. This is driven by fuel efficiency initiatives and a shift towards electric vehicles which continue to gain popularity as an environmentally sustainable alternative. Having said that, part of ACT investment strategy is on: 1) offering renewable fuels (biofuel blends, HVO100, electro fuel); 2) investing in electric vehicle charging stations (over 6,000); and 3) carbon offsetting initiatives.Governance risks we consider include ACT's financial policy which has historically been conservative, demonstrated through ACT's ability and willingness to de-lever after making large debt-funded acquisitions. We expect ACT to remain active with potential debt-funded acquisitions which could potentially increase ACT's leverage.The stable outlook reflects our expectation that ACT will likely maintain leverage in the 2x range and maintain positive cash flow from existing operations, and that a major acquisition could possibly raise leverage towards 4xwith expectations of declining below 3x reasonably quickly.FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGSA rating upgrade would be considered if Moody's believes ACT is likely to sustain adjusted Debt/EBITDA below 3x (1.9x for LTM Oct 2021) even after a leveraging acquisition, operating performance remains strong and acquisitions strengthen the business profile of the company.A downgrade could occur if Moody's believes ACT is likely to sustain adjusted Debt/EBITDA above 4x (1.9x for LTM Oct 2021), likely due to a leveraging acquisition.The principal methodology used in these ratings was Retail published in November 2021 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1296095. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.ACT, headquartered in Laval, Quebec, Canada, is a large operator of convenience stores (including fuel stations) with operations across 26 countries in North America, Europe and Asia. ACT's total network includes over 14,200 sites globally, directly operating 12,270 sites and around 1,900 sites under ACT's banners through licensing agreements. The company operates in two main segments; merchandise and service, and road transportation fuel and generated revenue of $53.2 billion and gross profit of $10.4 billion for the last twelve months to October 10, 2021.REGULATORY DISCLOSURESFor further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. 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