NATIONAL REPORT — High purchase price multiples, stable borrowing costs, favorable tax law changes and aging owners have combined to create “the perfect storm” for convenience channel consolidation.
These days, as the quest to find more assets continues, with companies seeking to accrete higher earnings and spread operating costs among increasingly larger store counts, buyers are looking to acquire portfolios that are big, small and everything in between, Ken Shriber, managing director and CEO of Petroleum Equity Group, told Convenience Store News.
“As an example, my M&A advisory firm, which by some comparisons is small, specializes in sell-side representation of portfolios ranging from three to five sites, up to 50 locations. Yet, when we approach potential buyers, we experience a uniformly excited reception no matter whether it’s from the large household names and consolidators that we work with daily, or from regional fuel distribution companies or smaller local players,” Shriber shared. “This speaks volumes about the intense approach to acquire that all the companies we deal with exhibit, and across the size spectrum.”
Terry Monroe, president of American Business Brokers, believes the c-store industry is experiencing “the perfect storm” now on account of low interest rates, high business valuations and the “baby boomer generation” factor — business owners in their 60s who do not have a family member either interested or qualified to take over the business.
“The combination of these three factors has increased the number of acquisitions that are taking place and will continue to take place until the cheap money dries up,” Monroe predicts, noting that cheap money also has led to higher valuations of businesses, making it a great time to be a seller.
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Overall, it is still a “seller’s market,” agreed Robert L. Valentine, managing director of Trefethen Advisors LLC. And he notes that as consolidation continues and the number of attractive retail opportunities diminishes, buyers have become more flexible in various ways.
“Previously, if you were a seller and wanted to retain real estate, there were limited opportunities to exit. Buyers have become flexible for the right assets. They are willing to enter into long-term leases and buy the business,” Valentine cited. “Additionally, the need to bifurcate a sale of retail and wholesale assets is often not necessary — a large number of buyers have developed multiple classes of trade: salary operated, consignment, pure supply, etc.”
M&A in the Year Ahead
When asked whether they expect convenience channel M&A activity to remain as robust in 2019, the experts CSNews spoke with seem to agree on three things:
- Yes, the merger and acquisition environment will remain very active;
- It’s getting harder to find “quality” acquisitions in the industry; and
- With almost all of the large chains having already consolidated, there’s not likely to be as many large deals going forward; rather, the focus is now shifting to the midsize chains that are left and smaller operators with between 10 and 100 stores.
It’s getting harder to find larger, multi-store, regional deals, especially those with quality store operations, pointed out Mark Radosevich, president of PetroActive Real Estate Services LLC — a firm that generally focuses on the traditional multi-generational marketer segment. He foresees much of the M&A activity ahead being among the 10- to 30-store operators, but said the challenge for buyers will be to match these opportunities with their established growth plans and geographic preferences.
“Look at the top 100 chains of stores and you will notice there is only a handful of chains who have a hundred stores or more. But there are a lot of chains in the 35 to 100 area and this is where you are going to see a lot more of the consolidation,” Monroe echoed.
Valentine agrees, but his prediction is a bit narrower. He foresees robust M&A activity around chains operating between 10 and 50 stores. Operators of this size need to grow and/or innovate, he said, but the reality is that the return of investment in a new-to-industry or remodeled site vs. a sale of existing stores is outweighed by the multiples that are being paid at this time.
“It is purely a numbers game,” he said. “If you are looking to acquire a chain with more than 100 stores, there are not a lot of options. The number of deals will increase with smaller store counts.”
Given the “patient” message by the Federal Reserve and an expected pause on increasing the federal funds rate, financial leverage will continue to be available in the market for high multiple purchases, added John C. Flippen Jr., managing director of Petroleum Capital & Real Estate LLC.
“Midsize and smaller firms will either decide to grow bigger and gain better economies of scale or sell at these higher multiples. The total percentage share of the top 10 convenience store chains is still modest relative to other types of similar industries and thus, there is still room for consolidation,” he said.
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