A Perfect Storm
The convenience store industry has been consolidating for a number of years now, with small and mid-sized chains selling their stores to larger companies. In the past year or two, however, the industry has seen a sizeable increase in the number of companies exiting the business altogether, with some of these being larger chains.
Just in the last year, two big sales included CST Brands Inc., based in San Antonio, Texas, acquiring Flash Foods Inc.’s 164 convenience stores for $425 million (the deal was announced in November and closed this February); and Dallas-based 7-Eleven Inc.’s purchase of all 180 Tedeschi Food Shops in the New England area.
“In the last 18 to 24 months, there has been a dramatic increase in acquisitions and companies selling their assets,” Dennis Ruben, executive managing director of NRC Realty & Capital Advisors LLC in Chicago, told Convenience Store News.
He explained that master limited partnerships (MLPs), such as Global Partners LP and Energy Transfer Partners LP, have been aggressive in growing their companies and can pay more because they have tax advantages. Also, traditional larger companies such as 7-Eleven and Circle K Stores Inc., and even private equity firms, are in purchase mode.
This trend is certainly reflected in this year’s Convenience Store News Top 20 Growth Chains ranking, our fifth-annual rundown of the convenience store chains that added the most net new stores year over year. Topping the list for 2016 are such formidable industry acquirers as Circle K parent Alimentation Couche-Tard Inc. (in the No. 1 spot), Speedway parent Marathon Petroleum Corp. (No. 2) and 7-Eleven (No. 3).
This year’s listing also includes some industry acquirers that are newer to the acquisition game, but no less aggressive than long-time players. Such companies include United Pacific (at No. 4), GPM Investments LLC (No. 5) and TravelCenters of America (No. 6).
Overall, this year’s Top 20 Growth Chains added a net 3,159 stores to their portfolios between January 2015 and January 2016, equating to a 12.3-percent increase for the year. Not surprisingly, in view of the impressive increase in acquisitions lately, this represents 689 more stores than what last year’s Top 20 Growth Chains added (2,470 net stores).
THE SELLERS
So, why are long-standing, large convenience store industry companies suddenly selling off their assets? According to NRC’s Ruben, it’s the “perfect storm of circumstances.”
“There are low gas prices, but also record margins. People are seeing margins they have not seen in a long time on fuel, so they are making more money. Customers are also spending more money in the store because gas prices are so low,” he said.
This has piqued the interest of buyers — and not just those in the c-store industry — and hence, large amounts of money are on the table. Companies that were thinking about selling in the past have realized with interest rates as low as they are, the offers coming in now for their businesses will not last forever.
“With the numbers being presented, it would be foolish not to think about it,” said Ruben. “People are looking at the market and the numbers, and are not sure it will be like this again. Interest rates will go up soon, so the time couldn’t be better to sell.”
Also, statistics show 10,000 baby boomers are retiring every day and that includes some c-store owners. Operators contemplating retirement are taking the opportunity to get out sooner rather than later, noted Terry Monroe of American Business Brokers & Advisors, based in Effingham, Ill. “They are now seeing they can get more money for their chains than they ever thought possible,” he said.
Sellers are getting offers higher than they have seen in years, particularly as large private equity firms are acquiring more c-store industry assets than in the past. One example is Fortress Investment Group Inc., which owned United Oil Co. and purchased Pacific Convenience & Fuels in June of last year to form the new United Pacific.
“Right now, money is cheap, and it will never get this cheap again,” Monroe explained. “We are getting a lot of calls from real estate equity companies and financial buyers that want to invest in a cash business that is still growing and can give great returns. The c-store business fits that [criteria].”
THE BUYERS
These days, the headline on the buyer side would read: The Big Are Getting Bigger.
The majority of buyers scooping up small and mid-sized chains are the largest convenience store chains and private equity firms. These groups have the cash to spend and are outbidding midsized chains as a result.
“Major industry players are going into new markets and expanding rapidly, and someone with only 50 stores can’t afford to pay what they can,” said Ruben. “A mid-size chain can’t just write a check, compared to big chains who are able to bid a lot of money and don’t need any financing. It’s the same eight or 10 people bidding, because they are the ones who can just write a check and can compete with the prices.”
John Flippen Jr., managing director of Petroleum Capital & Real Estate LLC, says this all started with the major oil divestures in 2008 and 2009. Ever since then, sales have been happening at an increased rate.
Now, it’s about the rise of the MLPs and the larger regional players. Of the past 28 deals facilitated by his firm, MLPs purchased 19 of them and private equity firms bought two, according to Flippen.
“Chains like CST Brands, Sunoco, Couche-Tard and 7-Eleven are buying whatever large chains they can find because they need to scale,” he said, pointing to 7-Eleven’s recent acquisition of more than 100 stores in South Florida and its purchase of Tedeschi Food Shops.
Buyers are looking for three things, according to Monroe. Cash flow is No. 1, followed by high-quality assets and the right locations. He finds buyers generally want city stores first, then suburbs and then rural, as cities usually bring in the most money.
Additionally, chains looking to sell need to be ready when it comes to attracting a buyer. “If I have a qualified financial buyer for a 20-store chain, but then I find out the books and operations are a mess and some of the stores are rundown, then it shows they are not prepared,” Monroe noted.
Today’s buyers are looking for quality assets in strong markets with good real estate and significant market share. They also prefer to own the real estate rather than lease, according to Ruben, who cited Flash Foods as an example of this.
“The deals that have brought in the highest price are large deals that move the needle for a company, where they can get instant presence in a market,” he said.
However, buyers are not only looking at large chains. Those previously limiting their transactions to chains with 50 or more stores are now expanding their scope to look at everything available in hopes of beating out the competition.
“Big players are now saying we want to see every deal, big or small. They are looking at deals they didn’t before because it makes sense to buy defensive,” Ruben said.
FUTURE CONSOLIDATION
The multiples that sites have been commanding in terms of price hit a peak in mid-2015. There is still a lot of activity and high bids happening now, Flippen said, but he doesn’t see prices going any higher than they are now. So, while the industry will continue to consolidate, eventually interest rates will increase and things will slow down a bit.
“The price of oil has dropped and margins have expanded, so there is a lot of cash and capital available to purchase assets,” said Flippen. “This won’t continue forever, but the consolidation isn’t going to end.”
The “feverish” trend of buying is projected to continue for at least another six months before tapering off, according to Ruben. Eventually, the majority of the c-store industry will be comprised of very large chains on one end and lots of single-store owners on the other end.
“We will see increasing consolidation, where six or eight companies control one-third of the c-stores,” he concluded.
“Big players are now saying we want to see every deal, big or small. They are looking at deals they didn’t before because it makes sense to buy defensive.”
— Dennis Ruben, NRC Realty & Capital Advisors