An Updated Outlook for 2016 M&A Marketplace
As 2015 came to a close, the merger and acquisition (M&A) marketplace within the convenience and gas station (C&G) industry didn’t show any real signs of slowing down. As expected by most market watchers, the first quarter of 2016 began with the disclosure that numerous new acquisitions have already been completed or are in the pipeline.
Listed below is an overview of some of the recently announced transactions and the various market implications associated with these acquisitions:
- Petroleum Marketing Group Inc., a large and privately held petroleum distributor, acquired 223 Gulf, Exxon and Mobil branded dealer-operated gasoline service station and convenience store sites formerly owned by Gulf Oil LP. The 223 retail sites are located in the Northeast and Mid-Atlantic sections of the United States, extending from Pennsylvania to Maine. Most of the locations are situated in the greater metropolitan areas of Boston and New York City/Long Island. Petroleum Marketing Group is a Shell, Exxon, BP, Mobil, Sunoco, Gulf, Crown and CITGO branded distributor that is primarily located in the Mid-Atlantic and Northeast regions of the U.S. and sells more than 1 billion gallons of motor fuel products on an annual basis.
- An affiliated company of Brookwood Financial Partners LLC, a private-equity (PE) investment firm founded in 1993 with more than $2.2 billion in assets under management, announced it reached an agreement to purchase 24 convenience store sites in Iowa and Nebraska from Kum & Go LC. The acquisition by an affiliated entity, BW Gas and Convenience Holdings LLC, was the firm’s second acquisition in the Midwest section of the U.S. in less than a year. The private-equity firm has publicly announced plans to acquire between 600 and 1,000 convenience stores over the next several years after studying various investment opportunities in the industry for well over a year. Brookwood Financial Partners is adding its name to the list of PE companies to recently decide that the C&G industry is fertile ground to acquire retail assets as the industry goes through this period of rapid consolidation.
- GPM Investments LLC, a Richmond, Va.-based retailer with more than 750 company- or dealer-operated convenience stores under management, announced it reached an agreement to purchase 21 convenience stores in the Midwest from Gas-Mart USA as part of a court-ordered auction, and 42 Apple Market convenience stores and 25 dealer-operated sites from Durham, N.C.-based Fuel USA LLC. GPM Investments is also one of the larger privately owned companies in the C&G industry.
- TravelCenters of America LLC continued its buying spree. On March 30, the company purchased 17 convenience stores in Wisconsin from Quality State Oil Co. Inc. The sites were quickly added to its Minit Mart network. Prior to closing on this acquisition, TravelCenters of America acquired an additional nine sites in two smaller transactions. The company’s aggressive acquisition activities since 2013 have allowed it to quickly acquire 200-plus locations that are situated principally in 11 Midwest states. Shortly before closing on this latest acquisition, TravelCenters of America’s CEO Thomas O’Brien mentioned during the company’s 2015 fourth-quarter earnings conference call that while the firm was reviewing many acquisition opportunities, the multiples sought by sellers were “out of whack” in some instances and the company would not overpay for future acquisitions. This is certainly a theme that has been echoed more recently by many CEOs when asked to comment on the current state of the M&A marketplace. Whether or not this “jawboning” by some of the more active buyers will have any real impact on marketplace multiples is yet to be determined. Seller expectations remain robust, to say the least.
- Imperial Oil Ltd. announced in March it reached an agreement to sell 279 retail service station and convenience store sites in Ontario and Quebec to Alimentation Couche-Tard Inc. for approximately $1.7 billion. The remaining portion of Imperial Oil’s Canadian network of 497 Esso branded sites was split between four other bidders: 7-Eleven Inc., Parkland Fuel Corp., Harnois Groupe Petrolier, and Wilson Fuel Co. Ltd. This latest mega deal in North America by Couche-Tard only reinforced a recent comment by the company’s CEO Brian Hannasch that stressed the role M&A will play in Couche-Tard’s long-term global growth plans. He noted during the same earnings conference call that consolidation in the industry was here to stay due to the never-ending market pressures, created not only by nontraditional retailers such as Kroger and Costco, but also from larger retailers such as Couche-Tard that are building bigger-format stores that have the ability to generate much higher monthly sale volumes than traditional sites. Since Couche-Tard’s stock price has doubled over the past five years, this is certainly an indication that the capital markets continue to be bullish on the company’s long-term growth plans and economic future.
While the first quarter of 2016 started where 2015 ended, there are certainly signs the growth in acquisition multiples may have peaked last year, as we mentioned in our last article.
If the first quarter of 2016 is a leading indicator, the mix or makeup of the most active consolidators going forward may also be changing and getting smaller. So far in 2016, the largest master limited partnerships (MLPs) have not been as active in the M&A marketplace. Global Partners LP actually announced in February the company planned to raise approximately $100 million by selling 125 retail sites by the end of this year.
There are several economic forces we believe will continue to reshape the M&A marketplace in the year ahead and have the biggest impact on the mix of potential bidders going forward.
Despite the recent uptick in crude oil prices, the downturn in the exploration and production segment of the petroleum industry continues. As a result, 45 U.S. oil and gas companies have already filed for bankruptcy since the beginning of 2015. The less-than-positive and uncertain sentiment about the financial health of the overall petroleum industry has negatively impacted the unit prices of midstream and downstream master limited partnerships such as CrossAmerica Partners LP, Global Partners LP, Sunoco LP, Delek Logistics Partners LP and MPLX LP (units are the MLP equivalent of stock shares). The unit prices for all of these MLPs are off their peak values by approximately 30 percent to 60 percent.
Most importantly, MLPs have been some of the most active and aggressive bidders and acquirers of C&G assets over the past several years. This negative outlook was only further reinforced when Global Partners announced in January that the company would cut its distribution to unitholders for the first time since its 2005 IPO filing. This announcement seemed to shatter the assumption that most of the midstream and downstream MLPs may be somewhat immune from the financial carnage that has occurred in the upstream portion of the industry.
The overall reduction in MLP unit prices across this segment of the industry has increased the overall cost of capital for the entire group and created a much more challenging environment for raising new capital. Since MLPs pay out a majority of their cash flow in the form of distributions to unitholders, the increased cost of equity will certainly make it harder for them to grow. This situation should cause this group of bidders to be more strategic or discriminating in the type and geographic location of assets they will pursue in the future and, most likely, conservative in the multiples and transactional terms the companies are willing to offer to sellers.
In addition, the recent rumors reported by Bloomberg News that Energy Transfer Equity LP has held private conversations concerning the possibility of selling its general partnership interest in Sunoco LP, and the ongoing activist shareholder interest in shaking up the management and/or possibly taking control of CST Brands Inc. and CrossAmerica Partners LP has only further muddied the waters for this group of previously active consolidators.
Since most experts in the industry believe MLPs will be less active and aggressive in the M&A marketplace in 2016, this should provide a golden opportunity for additional privately held petroleum distributors with superior financial resources and flexibility to once again compete for many of the more attractive acquisition opportunities. Over the past several years, many of these potential bidders have watched from the sidelines as MLPs, 7-Eleven, Couche-Tard, TravelCenters of America and private equity firms have dominated the M&A market.
Based on our firm’s involvement in Petroleum Marketing Group’s acquisition of Gulf Oil LP’s dealer network, and other ongoing acquisition opportunities, privately held companies are certainly in a better position to compete in the M&A arena than they have been in several years.
In today’s world of hyperactive central bankers, no article on M&A could end without mentioning the latest comments from the U.S. Federal Reserve and the implications for market interest rates in the United States. Historically low interest rates continue to be a major market catalyst that helps to fuel the M&A activity in the C&G industry.
Federal Reserve Chairwoman Janet Yellen continues to state risks posed by global economic and financial uncertainty are too great to justify a quicker movement toward normalizing market interest rates in the United States. The Fed simply has no appetite to materially raise market rates and in their March meeting, the Federal Open Market Committee indicated they now plan to dial back their previously projected number of rate increases in 2016. This was certainly music to the ears of the major consolidators in the industry.
Since most experts in the industry believe MLPs will be less active and aggressive in the M&A marketplace in 2016, this should provide a golden opportunity for additional privately held petroleum distributors with superior financial resources and flexibility to once again compete for many of the more attractive acquisition opportunities.