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03/13/2015

Consolidation Nation

2014 was one of the most active years on record for merger and acquisition activity in the convenience store industry, with some moves leaving even the most in-the-know experts surprised.

This year’s Convenience Store News Top 20 Growth Chains list reflects the huge merger and acquisition deals that were consummated last year. To recap some of the most significant moves: Marathon Petroleum Corp.’s Speedway LLC division purchased Hess Corp.’s retail holdings; Sunoco parent Energy Transfer Partners LP (ETP) bought Susser Holdings Corp., Aloha Petroleum Ltd. and 40 Tigermarket stores from Tiger Management; and CST Brands Inc. bought the general partner interest of what is now called CrossAmerica Partners LP, with the two companies teaming up to acquire Nice N Easy Grocery Shoppes Inc.

Other acquisitions announced in 2014, but not closed by the end of the year included Alimentation Couche-Tard Inc. merging with Kangaroo Express parent The Pantry Inc.; and CST and CrossAmerica teaming up again to acquire Erickson Oil Products Inc., operator of Freedom Valu stores, and Landmark Industries, operator of Timewise stores.

Dennis Ruben, managing director of NRC Realty & Capital Advisors LLC, said he was most surprised by the ETP/Sunoco acquisition of Susser Holdings. “I’ve known [Susser Holdings CEO] Sam Susser for 20 years and I didn’t see him as a seller,” Ruben said. “I also didn’t think Sunoco would expand from the East Coast to Texas.”

Ruben told Convenience Store News he was then even more surprised when ETP went to Hawaii and purchased Aloha Petroleum. “One thing I really learned last year is there are no longer any geographical boundaries for anybody in this business,” he noted. “Everyone is looking everywhere for offensive and defensive reasons.”

Also surprised by the ETP-Susser deal was John Sartory, managing director of Petroleum Capital & Real Estate LLC, but he was even more taken aback by the number of mammoth deals, such as the Speedway-Hess transaction and Couche-Tard’s purchase of The Pantry.

“The momentum is there to continue to consolidate,” Sartory said. “Although the c-store part of the business is definitely growing, the gas portion of the business is mature. Motor fuel volumes are projected to decline in the coming years, so it is natural people will want to consolidate.”

Consolidation is happening for many reasons, including the fact that the “convenience” retail space is more crowded than ever before, according to Ann Mann, communications director for CHS/Cenex Inc., ranked No. 9 among this year’s Top 20 Growth Chains.

“Drugstores, dollar stores, quick-serve restaurants, as well as other competitors are all in the convenience retail space, an area previously dominated by gas stations/c-stores,” Mann said. “Consumers have more options for their convenience shopping, which is putting pressure on c-store operators that have not invested to stay relevant with consumers in this highly evolved market.”

ANOTHER BIG YEAR FOR M&A?

It will be difficult to top what took place last year, but 2015 is expected to take its best shot. Although there are very few publicly traded convenience store-related entities left to be acquired, several acquisitions of mid-sized privately held companies could occur this year.

“When you look at our industry overall, the latest number I saw is we’re an industry of more than 152,000 convenience stores in the country and almost 65 percent of them are single-store operators,” said Tony Kenney, president of Speedway, this year’s No. 1 top growth chain. “That’s staggering. That tells you we’re an extremely fragmented industry.”

Hence, Kenney believes the M&A environment will be active for the foreseeable future. “I’m a believer that over the next period of time, there will continue to be further consolidation both at the smaller chain level and there may be one or two larger chains out there that might look at some opportunities to change their model in some fashion,” he explained.

Master limited partnerships (MLPs), flush with cash due to different tax requirements compared to other companies, will continue to be acquirers, noted Ruben.

“[EBITDA] multiples are almost irrelevant for these companies,” he said. “If it moves the needle in terms of being accretive to cash flow, they seem to worry about if they overpaid later on.”

A stipulation in President Barack Obama’s fiscal 2016 budget calls for MLPs formed by fossil fuel entities to be taxed as traditional C corporations, instead of their highly favorable tax treatment currently. However, even if approved by Congress, this rule would not go into effect until Jan. 1, 2021 at the earliest. Therefore, MLPs can feel safe about their tax situation when considering purchasing c-store assets.

Since EBITDA multiples have become so high, and with MLPs often outbidding pure-play retailers for assets, many mid-sized c-store operators have called NRC Realty already in 2015 looking to sell their businesses, Ruben confirmed. “I think in the next 12 to 24 months, you could see 30–40 percent of the c-store assets in the hands of half a dozen players,” he said.

As for the most likely acquirers, Ruben cited ETP/Sunoco (this year’s No. 4 top growth chain), CST Brands/CrossAmerica (Nos. 15 and 5, respectively), Global Partners LP and Casey’s General Stores Inc. (No. 6). Private-equity firms could also get into the mix, both Ruben and Sartory noted. Fortress Investment Group LLC, which in July acquired United Oil — the largest independent convenience store and gas station operator in the southern California market — was mentioned as one such firm.

CST Brands is always on the lookout for growth, Chairman, President and CEO Kim Lubel told CSNews. “When we looked at the retail space and the CST growth potential [before spinning off from Valero Energy Corp.], we saw that consolidation in the industry was going to be one of our greatest opportunities,” she recounted.

CST Brands’ leader noted that there are plenty of states the parent of Corner Store locations hasn’t touched yet. “I could see us doing a third-party acquisition and then a few years later, doing new builds in that area. A little Pac-Man strategy — buy and build around it, buy and build around it,” Lubel explained.

Discussing the c-store M&A environment in general, Casey’s Chief Financial Officer Bill Walljasper agreed the industry is “very fragmented with the majority of companies being operators of 10 stores or less. With this in mind and [the] competitiveness of the industry, we believe there will be continued consolidation.”

The names of c-store chains that could be acquired are more difficult to ascertain. One expert, speaking on the condition of anonymity, said Kum & Go LC has been mentioned as a strong acquisition target. But this expert added that Kum & Go management has not expressed interest in selling its business, and a sale is definitely nowhere near imminent.

ORGANIC GROWTH

While there are certainly plenty of companies likely to acquire c-store assets this year, there are also companies unlikely to get involved in any major acquisitions in the near future. Sartory said retailers such as QuikTrip Corp. (this year’s No. 13 top growth chain), Sheetz Inc. (No. 19), Thorntons Inc. and Wawa Inc. (No. 14) are instead excellent candidates to significantly ramp up organic growth, in part to keep up with competitor happenings in the marketplace.

Another phenomenon could take place this year for the first time in several years, predicted Sartory. Current private companies — perhaps seeking a capital infusion to drive growth plans — could file for initial public offerings with the U.S. Securities and Exchange Commission to become publicly traded stocks.

“It’s not likely that 50 companies will suddenly go public this year, but we could see three or four do so this year and every year in the near future,” said Sartory. “You could also see convenience store companies look to turn themselves into MLPs.”

To better understand who might take the public plunge, Petroleum Capital & Real Estate’s managing director said one must look at the makeup of the company. Family-owned businesses looking to raise cash, or private companies partially funded by a private-equity company are two examples of businesses that would consider becoming public entities.

“Private companies really into expanding growth will be willing to put up with the headaches of the public scrutiny to go public,” Sartory concluded. “Becoming a public company gives them much more access to capital to drive that growth.”

Six companies — Alimentation Couche-Tard, Casey’s General Stores, Murphy USA, QuikTrip, Sheetz and Shell Oil/Motiva Enterprises — have earned a spot on the CSNews Top 20 Growth Chains list all four years it’s been published.

This year’s Top 20 Growth Chains added 2,470 stores to their portfolios year over year.