CST Brands, Lehigh Gas Expand Reach With Deal

Press enter to search
Close search
Open Menu

CST Brands, Lehigh Gas Expand Reach With Deal

By Melissa Kress, Convenience Store News - 08/07/2014

SAN ANTONIO -- The $85-million deal between CST Brands Inc. and Lehigh Gas Partners LP (LGP) offers many benefits to both companies, chief among them an expanded geographic reach and a platform for future growth.

"Combined, we have operations from California all the way to the eastern tip of Canada. It's just shy of 3,000 sites. We are doubling our sites in the U.S. alone," said Kim Bowers, chairman and CEO of CST Brands, pointing out that the companies' geography is complimentary. "Building up our presence on the East Coast will allow us to continue to do new store growth in this direction and look for acquisitions in this area, as well bring the wholesale business out west to marry up with our operations in that direction."

All total, the combined company will be in 31 U.S. states and Canadian provinces.

Bowers' comments came as she and Joe Topper, chairman and CEO of LGP, joined with members of their executive teams to detail CST Brands' acquisition of 100 percent of LGP's general partners in a call Thursday morning. The companies announced the deal late Wednesday afternoon.

"Today is a big day for the partnership and the start of a great relationship between LGP and CST Brands," Topper said.

In addition to supersized footprint, a combined CST-LGP will have joint annual revenue of $16.3 billion and combined annual fuel volume of 3.9 billion gallons -- 2.9 billion gallons in the United States. Just as important, she said, the two will be marketing fuel under 11 different fuel brands.

"It moves us up significantly on the Fortune 500 list," she added.

In the call, Bowers emphasized that the San Antonio-based company is buying the general partner of Allentown, Pa.-based LGP.

There is no change to the limited partner unitholders. Over time, CST does expect to receive an ownership in LGP common units as partial consideration for the drop downs but initially CST's interest in LGP is limited to the general partner and all incentive distribution rights (IDRs).

Under the terms of the deal, public ownership remains as it is today with Topper and other insiders at 44 percent and the public at 56 percent, Bowers explained. Topper will continue as LGP's president and CEO. He will also join CST's board of directors once the deal closes, which is expected to happen early in the fourth quarter.

"I am very pleased that Joe has agreed to stay on as CEO and president of LGP. He will also be joining the CST board following the closing. In addition to sticking around to help us lead and grow our two companies, Joe is taking 80 percent of his purchase price in CST stock," she said. "To say he is 'all in' is an understatement. He is definitely not selling out; he is buying in."

Examining the strategic rationale behind the deal, Bowers said CST will get a growth vehicle for future expansion, and an infrastructure for the continued development and maintenance of the wholesale fuel supply business, new store growth and a front seat in a consolidating industry. LGP will get a sponsor with a healthy portfolio of five years worth of drop down opportunities.

"We get to bring two great companies with complementary skill sets together to enhance total shareholder and unitholder returns," Bowers said. "This truly is a win-win: two strong companies coming together to grow stronger together."

The proposed deal also offers several benefits for both companies for CST and its shareholders, including:

  • Immediate access to master limited partnership (MLP) capital markets to fuel organic growth.
  • Partial monetization of the multiple disparity between C-corp and MLP structures.
  • IDRs that will reach the high splits sooner than if CST had waited to form its own MLP in mid-2015.
  • Increase the geographic and brand diversity of CST’s current portfolio.

In addition, "the benefits for LGP unitholders are obvious, outstanding and great," Topper added.

The benefits for LGP and its unitholders include:

  • Better certainty of an increased rate of future distribution growth.
  • Greater certainty of drop-down asset acquisitions vs. third-party acquisitions.

It also positions CST and LGP to expand their core operations through third-party acquisitions and allows CST to avoid the market risk, expense and management time associated with a potential MLP initial public offering, Bowers added.

After the deal closes, new construction will be dropped down to LGP at fair market value and CST will receive cash of at least 75 percent of that value and LP units up to 25 percent of that value. In addition, equity in CST's wholesale fuel business will be dropped to LGP over time at fair market value with a similar cash distribution of 75/25, Bowers detailed.

CST will also continue to receive ongoing income from distribution related to the IDRs and from the LP units that CST will receive over time in the drop transactions, she said.

According to Bowers, CST will stay focused on convenience store operations while LGP will continue to focus on the wholesale fuel business.

"I think another skill set that LGP definitely brings to the table is a very strong and experienced [mergers and acquisitions] team that will really help us grow both companies," she added.

There will be no change in CST's Canadian operations.

"In sum, both companies are very excited about this transaction and the potential growth it brings to both our companies including the potential to unlock $300 to $500 million in value to CST shareholders," Bowers said. "LGP unitholders will get the benefits of a sponsored-MLP with a long-term potential drop-down story."