Mystery Bidder for Casey's - Analyst Blog

A third party has entered the fray to acquire Casey's General Stores Inc. (CASY) at $40 per share, thereby making the bidding war a bit messy as Couche-Tard's is looking forward to participating in Casey's auction process. While management has not defined who the third party is, it is believed to be 7-eleven going by the buzz in the air.

In April 2010, Alimentation Couche-Tard Inc, the Canadian convenience-store chain, made an unsolicited offer of $36.75 per share for Casey's. In September, the company raised its bid for Casey's General Stores by 4.8% to $38.50 in its latest effort to win over shareholders. But Casey did not entertain the offer citing the bid as too low.

Along with its first quarter 2011 earnings release, Casey formally rejected Couche-Tard's $38.50 bid and revealed that an unnamed third party had put forward a preliminary, all-cash proposal of $40/share late last week.

The third party offer values Casey at approximately $2.03 billion based on its share count from early September and considerably outstrips the $1.47 billion offer from Couche-Tard.

Nonetheless, Casey's board believes that both the offers from Couche-Tard and the mystery bidder, at a respective $38.50 and $40 per share, substantially undervalue the company. Accordingly, it recommended shareholders to spurn the recently hiked offer from Couche-Tard while negotiating with the third party to tender a proposal that would befit the true worth of the company. The company affirms that the average fundamental price target of sell-side analysts at $45 per share values Casey more appropriately.

Management hinted that following the hostile takeover bid from Couche-Tard in April, the company has engaged in a number of strategic moves to bolster shareholder value, making the current bids in all fairness a tad too low.

In a recapitalization effort, with the aim of lowering the cost of capital, the company bought back 26% of total outstanding shares at $38 per share. Consequently, shareholders gained more value based on reduced shares outstanding.

Casey also lifted its annual dividend by 35% to 54 cents a share. Based on Casey's closing share price on Wednesday, the new dividend level implies a yield of 1.3%.

Besides, management also unveiled that Casey's has signed commitments for the acquisition of 52 stores by the end of 2010 and it anticipates completing 20-25 new store constructions by year-end.

We believe that the unraveling of the currently ambiguous bid situation could go either way for the company. However, Casey remains a very well-run organization and it appears that it may begin to benefit from acceleration in acquisition driven growth as it has 52 properties in the acquisition queue.

The shares of Casey's rose 37 cents to close at $43.13 on Wednesday, slightly below the fundamental price target of sell-side analysts of $45.