Circle K (Canada) Owner Retakes Hong Kong Franchise in Bet on Asian Growth

The Canadian owner of the Circle K convenience store chain will buy the Hong Kong and Macao franchise operation, making its first direct foray into Asia while looking for more.Alimentation Couche-Tard will pay 2.79 billion Hong Kong dollars ($360 million) for the 373 Circle K stores, the Quebec-based retail group said Thursday. The store brand has existed in Asia for over four decades, becoming a household name in several countries.

ACT, which owns over 10,000 convenience stores and roadside fueling stations in North America and Europe, looks to close the deal with Hong Kong-based franchisee Convenience Retail Asia by year-end. Final considerations may vary based on cash and debt levels at the time of closing.

"We are proud to begin our journey in Asia with our acquisition in Hong Kong," Brian Hannasch, ACT's president and CEO, said during an online conference call Thursday.

Hannasch stressed the significance of gaining a foothold in Asia with a familiar and established management team on the ground.

The acquisition will provide the Canadian company "not only the opportunity to grow in Hong Kong, but give us credibility to do M&A and partnership in that part of the region," he said.

Hannasch emphasized that it was "logical" for his company to land in Hong Kong to watch for future opportunities, as the Chinese territory is a "central hub for global trading and for sourcing across Asia."

As a secondary benefit, the deal reclaims the rights to open Circle K shops south of the Yangtze River in mainland China, offering ACT more "flexibility to deal with China in the future," he said.

The Circle K brand traces its roots to 1951, when Fred Hervey purchased three Kay's Food Stores in El Paso, Texas. That developed into Circle K, and was acquired by ACT in 2003. In Asia, the brand was licensed in 1979 to Japan's Uny, which is now a subsidiary of the owner of discount retailer Don Quijote.

Though all the shops in Japan were converted to Family Mart by November 2018, the Circle K brand has expanded in other parts of Asia such as Hong Kong, Vietnam, Indonesia, Cambodia and Mongolia, all through licensing. The North American company now looks to take on operations for itself.

"I have followed Circle K Hong Kong's progress closely for decades and deeply admire its leadership team and retail expertise," Alain Bouchard, the founding chairman of ACT, said in a statement. He said that "together we can reach millions more customers in Hong Kong and across Asia as we move forward in our journey to become the world's preferred destination for convenience and fuel."

Derek Dley, an analyst at Canaccord Genuity, called the deal "a nice first step into the Asian market" for ACT, as it acquires a familiar partner and management team. He views the transaction as "low risk" while the Canadian company prepares for "acquisitive growth throughout Asia over time."

Convenience Retail Asia, or CRA, is relieved to unload this part of its business to someone it has known for a long time.

"The Board fully endorses the sale of Circle K Hong Kong to our long-term partner and [franchiser]," Chairman Victor Fung said in a statement Thursday.

CEO Richard Yeung echoed the sentiment.

"Having the brand owner directly involved in the business will create new opportunities for the brand and our staff," Yeung said.

CRA is 40.59% owned by Fung Retailing, the retail arm of Hong Kong conglomerate Fung Group. The sale gives CRA the chance to realign its portfolio, as the licensing agreement dating to 1985 was to expire in 2025.

Victor Fung, in a filing to the local exchange, noted the operational pressure from the complex logistics and supply chain infrastructure needed to maintain a wide range of products at multiple outlets. But further strain from Hong Kong's political unrest and the coronavirus pandemic "spurred the management team of the company to examine the long-term strategic options of the convenience store business in Hong Kong."

Tourists are a primary target customer. Most of them came from mainland China, but they have virtually disappeared recently.

CRA intends to spend the proceeds as a special cash dividend after the transaction is completed. It will be HK$3.85 per share. This news lifted the share price in Hong Kong during trading Thursday, as the stock closed at HK$4.81, gaining 18% from Wednesday's close.

"This is a win-win for both companies," the CRA chairman said. "Our investors will gain from a good return on their investment, and Couche-Tard will benefit from a first-class organization of dedicated and loyal team members who have contributed to the success of Circle K in Hong Kong."

But questions remain. Spinning off its convenience store business means CRA will lose over 80% of its total revenue in terms of the half-year results.

Management thinks the remaining business in two bakery chains -- Saint Honore and Mon Cher -- and franchise of Japanese eyewear chain Zoff will be sufficient to turn CRA itself a "leading high-quality specialty retailer."

Yet ACT may face a bigger question. The company lands in Hong Kong amid five consecutive quarters of contraction for the local economy. Retail sales, the territory's major engine, have been underwater for 20 months through September. And political uncertainty looms, especially given the national security law imposed by Beijing in June.

"We didn't expect [the security law] when we started our conversation a year ago," Hannasch acknowledged.

The president said he spent a lot of time consulting experts such as bankers, diplomats and politicians.

CRA eventually decided to proceed as "we believe in the long term," he said, adding that "while we can't fully de-risk that component, we think we understand it."