S&P affirms Couche-Tard's BBB- rating, with stable outlook, removes company from CreditWatch following completion of Statoil Fuel & Retail acquisition

NEW YORK , October 1, 2012 (press release) – Standard & Poor's Ratings Services today said it affirmed its 'BBB-' long-term corporate credit rating on Quebec-based Alimentation Couche-Tard Inc. (ACT). The outlook is stable. Standard & Poor's removed the rating from CreditWatch, where it was placed with negative implications April 19, 2012.

"The affirmation and CreditWatch removal follow the company's completion of the acquisition of Statoil Fuel & Retail ASA, a Scandinavian convenience store and motor fuel retailer," said Standard & Poor's credit analyst Donald Marleau.

The ratings on ACT reflect Standard & Poor's view of the company's position as a leader in the fragmented and competitive convenience store (c-store) industry in North America, as well as in the more concentrated Scandinavian market; its solid profitability and cash flow; and its intermediate financial risk profile. On the other hand, the company's financial risk profile is exposed to periodically high leverage as it grows through acquisitions, which could be compounded by some earnings instability associated with volatile
gasoline prices.

ACT is the second-largest independent c-store operator in North America with about 5,700 locations, although this accounts for less than 4% of the industry's stores. The July 2012 acquisition of Statoil adds about 2,300 stores in Scandinavia. We believe the Statoil acquisition strengthens the company's business risk profile by adding an established, profitable c-store
and fuel retailer with a strong market share of more than 30% in the mature markets of Sweden, Norway, and Denmark with good growth prospects in riskier, more fragmented Eastern Europe. The industry in North America has high fragmentation and has low barriers to entry, but ACT enjoys one of the strongest positions, enhanced by the brand equity of its banners, the quality of its real estate, and efficiencies stemming from the breadth of its operations. The company's relatively attractive position in North America and Scandinavia, solid merchandising, and proven track record of integrating acquisitions all contribute to returns on capital that rank among the highest for food retailers in North America.

The stable outlook reflects our view that ACT's strong market position in North America and Scandinavia and its continued operating efficiency will insulate it from margin pressure in this highly competitive industry, contributing incremental earnings and generating strong free cash flow for debt reduction that should result in leverage declining quickly to about 3x by the end of 2013. Beyond then, we expect the company to sustain credit measures that are consistent with its intermediate financial risk profile, characterized by fully adjusted debt to EBITDA of 2.5x-3.0x, funds from operations to debt of more than 25%, and EBITDA interest coverage of more than 5.0x. As such, we believe management's financial discipline in expanding by acquisition will be a key factor in maintaining the investment-grade rating.

Considering its strategic orientation of growing through acquisition, ACT has some latitude at the rating for periodically elevated leverage, but we believe that negative rating pressure would emerge if a transaction caused fully adjusted debt to EBITDA to exceed 3.5x with risky prospects for a return to below 3.0x. Moreover, the rating would be under pressure if increased competition caused weaker earnings, particularly from merchandise and services, keeping debt to EBITDA above 3x.

RELATED CRITERIA AND RESEARCH

Methodology And Assumptions: Standard & Poor's Revises Key Ratios Used In Global Corporate Ratings Analysis, Dec. 28, 2011
Key Credit Factors: Business And Financial Risks In The Retail Industry, Sept. 18, 2008
2008 Corporate Criteria: Analytical Methodology, April 15, 2008

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