Parkland (PKI) posted a pretty weak Q4, missing both top and bottom-line estimates by a wide margin, with $428M of adj. EBITDA (consensus was $440M) driven by weak volumes in the U.S. business and operational disruptions in the refining business.

Despite the bad print, shares finished up ~6% on the day driven by management’s strategic review announcement.

With shares stuck in the mud over the past 5 years, investors are likely excited by the prospect of PKI becoming the next Canadian takeout story after Innergex, another underperformer, announced its deal recently.

We dive into what’s led up to this point, what the likely outcome of a strategic review could be, and what we think the company is worth in a deal and no deal scenario.

10 years of deal-making catches up with PKI

Over the past decade, Parkland has grown rapidly through its buy and build strategy. From 2016-2022, the company spent nearly $12B on acquisitions.

It started this deal cycle in the Canadian gas station and retail business, moved into the refining and international markets with splashy deals, and then returned to retail acquisitions with the takeout of M&M Food Market (they have great chicken fingers).

The deals drove growth but pushed leverage higher too, with the company finishing the year with a 3.6x leverage ratio and attracting activist attention from Simpson Oil (19.8% owner) and Engine Capital (2.5% owner).

Incentives for a takeout, but is there a buyer?

We think management is incentivized to sell. In a change of control event, the CEO would get 2 years of annual compensation (~$11M). The potential for the Canadian government to block a U.S. acquisition could take the biggest pool of capital off the table though, hurting valuation potential.

The obvious pick among potential Canadian acquirers would be Alimentation Couche-Tard (ATD), which could benefit from PKI’s Canada/International portfolio given it’s overweight U.S. footprint.

That said, ATD is currently trying to make a much larger bid work for Seven & i Holdings (7-Eleven), which could cost nearly $50B and require $12-18B in new equity according to TD and BMO analysts.

Should that deal go through, it’s unlikely ATD would also swallow Parkland in its entirety. ATD could be a partial buyer though, as PKI management looks to execute >$500M in divestitures in 2025.

What could it fetch or where could it trade?

The street often looks at EV/EBITDA for this name, where PKI trades about 1.5 turns below its average multiple over the last 20 years. The accumulation of businesses during the company’s M&A spree could be driving a sum of parts discount. Management must believe so, if it thinks asset divestitures could be a solution.

PKI’s FCF yield looks attractive on a market cap basis at 16.9%, though using enterprise value is the more appropriate (and less compelling) approach, to account for the increased debt load. It’s cheap, but not that cheap.

Bottom-line: PKI shares have traded in a tight band over the past 5 years for good reason, and we’re hesitant to get too excited at this stage. A deal at 8x would represent ~35% upside from today’s prices, though we wouldn’t expect the company to take that price. A no-deal scenario could work too, as PKI could show the market what it’s worth via a partial sale, and use divestiture proceeds to buy back stock (at a discount).