Merger Mania

Merger & acquisition (M&A) activity has been rapid in 2014 and 2015, with no signs of slowing down. Evidence of these fast-paced changes can be found when doing year-over-year comparisons of the Convenience Store News Top 100 rankings.

Many names fell off the list this year after being acquired, while others made impressive moves up the rankings, and another group of companies entered the list as new kids on the block. With the exception of 7-Eleven Inc. ranking as the No. 1 U.S. c-store player in terms of locations for another consecutive year, most other companies saw position changes. In fact, none of the other top 10 c-store chains on this year’s list occupied the same position last year.

If economic cycles tell us anything, it’s that the feverish M&A activity in the convenience and fuel retailing industry has to end someday. However, experts don’t think the day is near.

“There’s no reason right now to believe the dynamics moving everyone toward further consolidation are going to subside,” said John Sartory, managing director of Petroleum Capital and Real Estate LLC.

M&A in different shapes and sizes should continue. Whether it’s a one- or two-store acquisition that garners little fanfare, or something as big as Alimentation Couche-Tard Inc.’s recent purchase of The Pantry Inc., he said nothing is out of play.

“I think you will see a wide spectrum of transactions that are bigger, smaller and in-between,” revealed Sartory. “I think there will be a lot of smaller sellers who have no more than 10 or 15 sites, and I think you will have larger mega-deals. I think these deals will occur because the appetite is there and the credit is available.”

Tim Powell, founder and principal of Think Research & Consulting, also sees no sign of an M&A slowdown. “There is still a lot of room for activity,” he said. “There are far more single stores and independents to be had. Location is the name of the game and regional chains are looking to buy share.”

Also in agreement is Ben Brownlow, equity research analyst for Raymond James Associates Inc. “There is still a ton of opportunity,” he stated. “There are 150,000 fuel/convenience stores in the country and two-thirds are mom-and-pop operators, so it’s still a very fragmented industry with a ton of consolidation left.”

As for the retailers likely to be acquirers, Dennis Ruben, executive managing director of NRC Realty & Capital Advisors LLC, named CST Brands Inc. and Sunoco LP.

“Also, there are other master limited partnerships (MLPs) that will continue to be buyers,” he said. “Interestingly, there are two MLPs coming to market [as initial public offerings] in GPM [Petroleum] and Empire [Petroleum Partners]. These companies have been growing at aggressive rates.”

In fact, even the acquirers could become the acquired. In a recent Barron’s article, Mario Gabelli, chairman and CEO of Gamco Investors, said CST Brands — which along with its partner CrossAmerica Partners LP has purchased multiple c-store assets in recent months — could itself be taken off the market by a competitor.

“CST’s CEO Kim Lubel isn’t opposed to a takeover if somebody knocks on the door and offers the right price,” said Gabelli.

CAN ANYTHING STOP THE PARTY?

Right now, little can slow down the M&A environment that Ruben of NRC Realty characterizes as a “perfect storm in a positive way.”

“You have low interest rates, multiples that have been high, and strong fuel margins allowing customers to have more disposal income,” he said. “The trends we’ve seen for c-store retailers for the past six months have been very positive. Before long, you will have one-third of the convenience stores in this country in the hands of a half-dozen people.”

There is likely only a couple of ways to slow down the flurry of M&A activity the c-store industry is seeing, according to Sartory. Macroeconomic events, including weakening of the credit markets or the overall economy, would curtail such activity.

“Something that pushes the economy into a recession would be one way. Also, it looks like the Fed [Reserve Bank] will look to raise short-term interest rates. This could cause the stock market to go down. It’s even possible the market could correct by more than 10 percent once this happens.”

The Federal Reserve kept interest rates at zero during its June 17 meeting. But industry pundits such as Phil Orlando, chief equity strategist and portfolio manager at Federated Investors, point to September as the first time the Fed would look to raise interest rates, with the possibility of another rate hike in December. If the stock market corrects, several potential acquirers could hold back on M&A activity fearing they must maintain their capital.

Sartory stressed, however, that an interest rate hike alone doesn’t necessarily mean a big stock market decline will take place. “The market only tends to act violently if unintended consequences occur,” he said. “If interest rates only rise 25, 50 or 75 basis points over the next year, I don’t see that throwing cold water over the M&A market. Historically, we would still be in a very low interest rate environment and I think the party continues.”

The party could stop, though, if supply and demand metrics change. Plenty of c-store assets are currently on the market because sellers are seeking — and recently have been receiving — premium prices for their assets. If buyers find out that purchased assets have not been performing up to expectations, they can remove themselves as acquirers, leaving plenty of sellers on the market and few buyers, which would make asset price tags come down sharply.

“If a company makes an acquisition and a year later learns they overpaid and it is not reaching their financial goals, that may make some public companies that have been very aggressive in their bidding think twice,” responded Sartory.

At least in the near-term, Ruben believes there will be no seller shortage. But looking out further, c-stores are performing so well now that some sellers may sit on the sidelines and enjoy the ride as opposed to shedding assets, he noted.

“Sellers may look at their assets and say, ‘I understand the multiples are very strong, but I’m making a lot of money right now. If I cash out, tell me where I can park this money to get the same kind of return?’” he concluded. “It’s a really good question.”