Can M&A Get Any Hotter in the C-Store Industry?
The red hot merger and acquisition activity in 2014 included several major mega transactions such as Speedway LLC purchasing the Hess Corp. retail network, CST Brands Inc. acquiring 100 percent of the membership interest in Lehigh Gas GP LLC, Susser Holdings Corp. selling to Energy Transfer Partners LP, Global Partners LP purchasing the equity interest of Warren Equities and, of course, the recent announcement that Alimentation Couche-Tard Inc. will acquire The Pantry in an all-cash transaction.
These were big announcements made by some of the most active publicly traded companies within the convenience and gas station (C&G) industry, but there was also an explosion of smaller private transactions from coast to coast.
So, what does all this recent M&A activity in the C&G industry mean for 2015?
One of the first questions a new or existing client, banker, private equity investor, source of capital, industry-related supplier or member of the media inevitably asks us when we attend any industry-related meeting revolves around the following question: Do we think the almost-breakneck pace of M&A activity that has occurred in the C&G industry over the past five years will continue? And if so, what market forces or external events will continue to drive this ongoing process or could slow down or inhibit the current pace of merger activity?
While no one can accurately predict the future, listed below are some of the market forces and/or external events that will continue to support the current pace of consolidation within the C&G industry.
AN ALMOST UNLIMITED SUPPLY OF WILLING SELLERS
While the C&G industry landscape has radically changed over the past 10 years, the simple truth is that the industry is still fragmented and includes hundreds of small to mid-sized companies. Unlike other major retail industries in the United States, there is no retail chain that dominates or controls a large percentage of the marketplace. Simply stated, at this time, the C&G industry does not include a McDonald’s, Burger King or Wendy’s.
In addition to the fragmented nature of the marketplace, there are generational forces that are feeding the M&A marketplace. Many of the current sellers in the industry started their family business in the ‘50s, ‘60s or ‘70s and for whatever reason, no member of the family’s second generation is interested in operating and/or growing the existing business. As a result, the most viable exit for the founding member of the business is to sell.
MARKET MULTIPLES & SALES TERMS VERY ATTRACTIVE FOR SELLERS
Open discussion of the current prices or multiples that most aggressive buyers are willing to pay for C&G assets has quickly filtered its way throughout an industry that had been known for most of its history to be fairly secretive about transactional pricing and the overall terms of any sale.
This increased visibility into market pricing has been an obvious plus for any seller that has been contemplating exiting the industry. After Marathon Petroleum Corp.’s retail subsidiary Speedway announced its $2.82-billion purchase price for Hess’ retail network and associated 16.1 times multiple of Hess’ 2013 pro-forma EBITDA, any seller that was still on the fence had to take notice.
Our firm represented one of the companies that participated in the Hess bidding process, and while we were not surprised that Speedway was the successful bidder, we also felt the ultimate purchase price was certainly on the very outer range of potential values for the assets.
In addition to the aggressive multiples that buyers are willing to pay in this current environment, especially for superior retail assets such as the Hess network, the various sources of capital that are funding these acquisitions have been loosening their underwriting standards for buyers. As a result, sellers are more comfortable that traditional post-closing liabilities, such as environmental, can be walled-off or quantified.
THE NEED TO GROW OR SELL MENTALITY DOMINATES THE MARKETPLACE
While the industry is still fragmented, most savvy marketers understand that the most active regional players and major consolidators in the industry, such as QuikTrip Corp., Sheetz Inc., Speedway, Global Partners, Alimentation Couche-Tard and 7-Eleven Inc., are going to continue to expand through additional acquisitions and/or organic growth.
The traditional small or mid-sized distributor that directly competes with these marketers does not enjoy the same marketing, operational or supply economies of scale as their larger competitors. Many of these marketers must either grow or upgrade their traditional business model, or they will most likely face an environment in which their company’s EBITDA will continue to decline over time.
These smaller marketers also face the ultimate “Catch-22” situation — many want to expand, but in order to quickly expand in their existing trade areas, they must become active in the M&A marketplace. However, in order to be successful, these smaller marketers in many instances must outbid their larger competitors that enjoy many obvious advantages in the bid process such as access to more flexible and competitive sources of capital.
IT’S THE ECONOMY
Although the United States has seen below-trend growth in gross domestic product (GDP) since the end of the Great Recession, it looks like growth may now be accelerating. GDP recently grew 5 percent in the third quarter and 2.6 percent in the fourth quarter.
The Federal Reserve could raise interest rates in the second quarter of this year, but with low inflation expectations and the tailwind of lower gas prices at the pump, we may be able to continue along in this “Goldilocks Economy.”
MLPS & PUBLICLY TRADED ENTITIES
The growing number of master limited partnerships (MLPs) and the increasing share prices of publicly traded C&G companies have had a significant impact on purchase multiples and the overall level of M&A activity within the industry. MLPs specifically have had an enormous impact on the current multiples being paid for supply-only agreements that are normally part of any acquisition opportunity.
These large public entities have an ability to finance acquisitions with a more flexible and lower cost of capital when compared to most traditional bank financing options and, most importantly, guarantee any seller a non-contingent and quick closing. If interest rates remain low by historical standards and the loan standards in the capital markets continue to loosen, this will further support increasing M&A activity in 2015 by this group of active buyers.
The above points are some of the reasons why the strong M&A tailwind from 2014 will continue to blow in 2015 and we expect to see further consolidation with the C&G industry. In our next article, we will discuss the market forces and/or external events that could inhibit future M&A activity in 2015 and beyond.