Analyzing the Impact of ETP-Susser Merger

DALLAS and CORPUS CHRISTI, Texas - Thursday, April 28 began like any other until Energy Transfer Partners LP (ETP) stunned the convenience channel with news that it reached a deal valued at $1.8 billion to acquire Susser Holdings Corp.

By acquiring Susser Holdings, Dallas-based ETP (owner of Sunoco Inc.) will own the general partner interest and the incentive distribution rights in Susser Petroleum Partners LP, approximately 11 million Susser Petroleum common units — representing approximately 50.2 percent of outstanding units — and Susser's retail operations consisting of 630 convenience stores.

"The Susser transaction came out of the blue. We had thought that Energy Transfer wanted to extricate itself from the retail fuel business it entered with the Sunoco acquisition. Instead, they doubled down," said Ethan Bellamy, senior analyst with Robert W. Baird & Co.

John Flippen, managing director of Petroleum Capital and Real Estate LLC, agreed the headline-grabbing deal came as a surprise, but he acknowledged it is a great strategic fit for ETP and its Sunoco assets given the above-normal growth happening in the Texas area.

Once the deal closes sometime in the third quarter, ETP will "drop down" all of its retail assets to Susser Petroleum, which will continue to operate as a publicly traded master limited partnership (MLP). As a result, the retail business will operate separately from ETP.

"I think it makes the most logical sense and given the history of why the major oil companies have spun off their retail assets — high managerial and operational costs relative to returns — a leaner, private equity-backed operator will most likely run the whole network more efficiently," Flippen said.

With the formation of the MLP, Energy Transfer is looking for synergies with all the other acquisitions it has done, according to Dennis Ruben, executive managing director of NRC Realty & Capital Advisors LLC.  Those acquisitions include Sunoco in 2012, Mid-Atlantic Convenience Stores in 2013 and TigerMart in Tennessee earlier this year.

The synergy plan is probably why ETP can justify the $1.8-billion price tag for Susser Holdings — a number many analysts agree is not outrageous considering the deal.

"I do not think the price is unreasonable given the stated EBITDA and the expected synergies provided by the merger," Flippen reasoned.

Synergy opportunities from the ETP-Susser deal are expected to exceed $70 million annually from fuel, merchandising and improved "buying power" reflecting economies of scale. The commercial and operational synergies are expected to be realized within six to 12 months after closing.

Since news of the deal broke, Sam L. Susser, chairman and CEO of Corpus Christi-based Susser Holdings, has said his company would have been fine continuing as it was, but ETP's proposal was too compelling to pass up. Analysts also agree it would have been hard to pass up the offer of a 40-percent premium to the stock price.

"ETP offered a very compelling value, a way for insiders to monetize and diversify their net worth, and a way to supercharge long-term growth via superb access to capital," explained Bellamy of Robert W. Baird & Co., noting Susser Holdings received a full and fair price.

THE COMPETITIVE LANDSCAPE

The addition of Susser's 630 convenience stores, mostly branded Stripes, to Sunoco's network of more than 5,000 locations, primarily on the East Coast, will broaden Sunoco's geographic footprint by giving it an exceptional base in Texas and the surrounding states.

What will this newly formed powerhouse mean for the convenience store landscape in Texas?

"My guess is there will more pressure on players throughout the East and Southeast before expanding throughout the Southwest," Flippen said.

Ramped-up competition for regional players will be just one consequence of the ETP-Susser merger. Another consequence could be increased acquisition activity.

"All the c-store people with a significant presence in Texas will be looking hard at deals. They will realize that ETP is the '800-pound gorilla' and they will approach potential acquisitions by stepping up with a higher number to get some of these deals," NRC's Ruben said. "Frankly, that is good for people who are thinking about selling right now. It shows there will be a robust demand for companies that are well run and have good infrastructure."

Mid-sized companies with 25 to 75 stores will either have to grow, sell or die, he added.

"In my view, it is becoming increasingly difficult for the mid-sized operators — family-run companies, for example — to compete with these large companies [that] have advantages like buying power and fuel supply. If QuikTrip or Wawa goes into some of these markets, it becomes much more difficult for the small guy to compete," Ruben noted.

In a broader sense, this deal could also signal that MLPs are the way to go.

"MLP and publicly traded companies within the retail petroleum sector are natural extensions of the divestiture of retail assets by the major oil companies," Flippen said. "The retail sector will continue to be consolidated by these public companies until interest rates rise and/or a recession occurs. The primary suppliers -- major oil companies -- have stated they would prefer a less fragmented market of customers."

Ruben also observed consolidation is the name of the game now, explaining that the recent Speedway LLC-Hess Corp. deal falls into the same bucket.

"I see these last two deals as the next evolution of the industry. The last one was when [Alimentation Couche-Tard] tried to launch a hostile takeover of Casey's. Things were kind of business-as-usual up to that point," he said. "Once Couche-Tard made the effort — and Casey's fought real hard to resist it — everybody began looking over their shoulders. Are they going to be next?"

More importantly, the attempted takeover spurred Casey's — and other retailers — to change their approach to business, according to Ruben.

"[Casey's] had not done many acquisitions prior to the time that Couche-Tard tried to take them over. After that, you read they have done some acquisitions and they have been much more aggressive in growing," he said. "I think some of the things out there in the industry, and the overtures made by some companies, have made everybody more aggressive in terms of their growth plans and looking at things they may not have looked at otherwise."

The consolidation trend, which has existed for the past several years, has especially accelerated in the last three years with a more advanced rate by a handful of large players. The MLP structure has facilitated that to a great degree, said Ruben.

But does consolidation bring the risk of convenience store companies becoming too big?

Not necessarily, industry consultant and professional intermediary Terry Monroe believes.

"There are around 150,000 convenience stores in the United States, with the independents having over two-thirds of the market," Monroe explained. "Think of it like this. Who is the McDonald's of the convenience store business? You are right. There isn't one. And there isn't a Burger King or Wendy's of the convenience store business either. We have a long way to go before we see market dominance by a convenience store company."