Waning Days of Summer Are Hot for C-store M&A

While preparing our latest update on the merger and acquisition (M&A) market during the waning days of summer, the marketplace in the convenience and gas station (C&G) industry was certainly showing no signs of cooling off.

Alimentation Couche-Tard Inc. just announced its mega-merger with CST Brands Inc. in a deal valued at $4.4 billion. The planned transaction represents the largest merger and acquisition that the company has ever completed.

But before detailing this and other deals, let’s focus on the Brexit effect on global interest rates, United States central bank policy, the shifting corporate landscape, and select commentary from leaders in the industry.

NEWS UPDATE

The Bank of England (BOE) announced shortly after voters in the United Kingdom decided in June to exit the European Union (Brexit) that it would commence with a new and aggressive program of monetary quantitative easing to lower market interest rates in the U.K. and hopefully stimulate the British economy. The BOE is basically betting that its new monetary program will offset the anticipated negative economic impact of the uncertainty surrounding Brexit.

The BOE’s action was just the latest in a series of monetary policy initiatives coming from European central bankers that quickly led to another fall in global interest rates. This downward movement in rates was the most recent sign of how central bank policies in the developed world are interrelated and have intensified a worldwide collapse in borrowing costs.

The 10-year treasury yield in the United States has dropped from 2.27 percent on Dec. 31, 2015 to a historic low of 1.37 percent on July 8, 2016. The Wall Street investment bank, Morgan Stanley, recently predicted the rate may drop to 1 percent before the end of the year.

The most startling news relating to these polices is that the total global volume of sovereign and corporate bonds with negative nominal yields now exceeds $12.6 trillion, according to data assembled for the Financial Times by the financial services group Tradeweb. This figure represents almost half of all debt in the western world.

These international events are occurring as U.S. Federal Reserve Chairwoman Janet Yellen and the other members of the Federal Open Market Committee (FOMC) continue to debate and worry about the possibility of finally raising short-term interest rates in 2016 by a meager 25 basis points before the end of the year. This year started with many financial experts and the futures market predicting the Fed would most likely raise its short-term benchmark interest rate, the federal-funds rate, by 100 basis points by the end of 2016.

The reality for the Federal Reserve is that it is hard to raise interest rates in a world where everyone else is cutting rates and overall economic growth and demand is weak in the U.S. and elsewhere around the globe.

While central bankers in the United States, Japan, United Kingdom and Europe continue to double-down on extraordinary monetary actions, many economic experts are starting to question whether ultra-low rates are really forcing households to save more of their income, not spend more. In addition, numerous financial experts and political leaders are starting to suggest that negative real interest rates in most of the developed world have inspired in the business community confusion, risk aversion and, most importantly, only encouraged business consolidation. Many business leaders seem to lack the confidence needed to expand operations, invest in new plants and equipment, develop new products and create new jobs.  

In this unprecedented and seemingly never-ending period of ultra-low interest rates, the safest path to growth for many businesses is to grow revenue by acquiring a market competitor.

These overall market trends are certainly prevalent in many segments of the C&G industry.

RECENT TRANSACTIONS

Listed below is a brief overview of some of the recently announced or completed acquisitions that have occurred in the C&G industry in the second and third quarters of 2016. The level of M&A activity in the industry has certainly picked up over the past two quarters, led by Alimentation Couche-Tard’s blockbuster announcement of its merger with CST Brands on Aug. 22.

During Western Refining Inc.’s second-quarter earnings call, CEO Jeff Stevens reviewed its recently completed acquisition of Northern Tier Energy LP and announced that the newly merged company planned to greatly expand its combined retail operation in the Midwest and Southwest sections of the U.S. The newly merged network now includes 400 convenience stores that currently operate under the SuperAmerica, Giant, Mustang, Sundial and Howdy brand names and 114 franchised locations that operate under the SuperAmerica LLC trademark. Western Refining has the financial wherewithal to become one of the newest corporate players in the M&A marketplace if the company follows through on its CEO’s statement.

BW Gas and Convenience Holdings LLC, an affiliated company of the private equity investment firm Brookwood Financial Partners LLC, announced that its growing chain of convenience stores that are currently concentrated in the Midwest section of the U.S. will be branded Yesway; introduced design plans for the new stores to the public; and discussed its goal of quickly upgrading the sites the company has already acquired.

In addition, to add further credibility to its previously stated goal of acquiring between 600 and 1,000 convenience stores throughout the U.S. over the next several years, the company announced that Joe Petrowski, former CEO of Cumberland Farms and Gulf Oil, has joined the firm as a senior advisor and member of its executive committee.

These moves may indicate one of the newest private equity players to enter the industry is really serious about developing a national convenience store brand and not simply focused on assembling a network of sites that can be quickly sold for a very nice return on its investment in a couple of years. Private equity players have come and gone in the C&G industry over the past several years. Only time will tell if this new investment group sticks to its stated strategic plan.

In one of the most surprising announcements of 2016, privately held conglomerate The Guess Corp., which currently operates businesses that market such luxury merchandise as diamonds, fine art, yachts, private islands and jets, issued a press release in July stating that it planned to acquire more than 1,000 convenience store sites over the next 12 months. In order to ensure the acquisition program will be successful, the company is planning to offer above-market compensation rates to real estate brokers who can locate potential acquisition targets. In addition, the company promises to pay sellers their full asking price and guarantees a quick closing process that could be as short as 72 hours. In August, The Guess Corp. also announced it had selected Scott & Cormia as its exclusive architecture firm to design the new upscale convenience stores that will be acquired and remodeled by the company. These dual announcements were met with a certain amount of skepticism within the industry.

TravelCenters of America LLC’s CEO Thomas O’Brien mentioned on the company’s second-quarter earnings call that given the current and ongoing seller expectations from a value standpoint, the company was going to be taking a break from its aggressive M&A activity over the past several years and concentrate on improving the performance of the 200-plus convenience store locations it has already acquired. The CEO also stated the company was willing to become more active again in the marketplace if pricing became more attractive. This decision is not too surprising given O’Brien’s comments in 2015 that multiples sought by sellers were out of whack in many instances, and the company would not overpay for future acquisitions.

Alimentation Couche-Tard announced its planned merger with CST Brands in an all-cash transaction for $48.53 per share, which equaled a total enterprise value of $4.4 billion in U.S. dollars including net debt assumed. Market analysts are projecting that Couche-Tard has agreed to pay somewhere between 10-11 times CST’s trailing EBITDA, before including approximately $150 million to $200 million in post-closing synergies in the final acquisition calculation. The acquisition price represented approximately a 42-percent premium for CST’s stockholders based on the share price prior to the company’s announcement in March of this year that it would explore and review strategic alternatives to enhance stockholder value. Couche-Tard also announced the company entered into an agreement with Parkland Fuel Corp. to sell it a portion of CST’s Canadian assets after the merger for $750 million in U.S. dollars.

Texas-based CST currently operates more than 2,000 locations throughout the United States and eastern Canada. In announcing this latest mega deal, market experts assume Couche-Tard won a bidding war that may have involved numerous private equity firms such as Apollo Global Management and Blackstone Group LP, 7-Eleven Inc., Marathon Petroleum Corp., OXXO Mexico (a subsidiary of FEMSA), and Lawson Inc.

The two companies are planning to close the transaction in early 2017 and it is still subject to the approval of CST’s stockholders and regulatory approvals in the U.S. and Canada.

Prior to CST Brands’ announced merger with Alimentation Couche-Tard, 7-Eleven and its wholly owned subsidiary SEI Fuel Services Inc. closed on the acquisition of 76 convenience stores in California and three in Wyoming from CST Brands for $408 million. This eye-opening acquisition price reflected 7-Eleven’s willingness to pay, on average, more than $5 million per site to expand its market share in the very desirable and high-margin California marketplace. The previously branded Corner Store sites are located throughout California, and the network extends from San Diego to San Francisco. The average per-unit purchase price paid by 7-Eleven indicates that the larger corporate consolidators are still willing to pay a high multiple for a strategic acquisition located in an attractive real estate market.

Global Partners LP completed and/or announced three transactions in the second quarter that strategically fit the new reality for many master limited partnerships (MLPs): their need to reduce the partnership’s overall level of leverage and increase liquidity, while simultaneously growing their revenue streams.

In the first transaction, Global acquired a leasehold interest in 22 Shell- and Mobil-branded retail sites in western Massachusetts by entering into a long-term lease arrangement with the prior owner and operator of the properties, O’Connell Oil Associates. This type of acquisition financing allowed Global to minimize the amount of cash it needed to deploy at closing to acquire control of the retail assets and associated cash flow generated by the business.

In the second transaction, Global raised cash by selling 30 of its existing retail properties to an institutional real estate investor for $63.5 million, while simultaneously entering into a long-term unitary master lease covering the same locations with the investor that purchased the properties from Global at the closing. The company announced the cash raised by the sale-leaseback transaction with the institutional real estate investor would be used to reduce debt under the partnership’s revolving credit agreement with its lenders.

Finally, Global announced it had entered into an agreement to sell 31 gas station and convenience stores sites located in New York and Pennsylvania, which it had purchased in 2015 as part of the Warren Equities acquisition, to Mirabito Holdings Inc. Binghamton, N.Y.-based Mirabito currently operates approximately 75 convenience stores under the Mirabito, Quickway Food Stores, Convenience Express and Manley’s Mighty-Mart brand names. In addition, both parties agreed to enter into long-term supply contracts for branded and unbranded motor fuel products as part of the transaction.

Miami, Fla.-based World Fuel Services Corp. completed its second major acquisition in less than a year when it announced the company had closed on the acquisition of two large petroleum distributors, PAPCO Inc. and Associated Petroleum Products Inc. (APP). Both companies are major suppliers of gasoline, diesel fuel, propane, heating oil, aviation fuel, marine fuel, lubricants and other related services to retail, commercial, agricultural and residential customers in their respective trade areas. PAPCO is headquartered in Virginia Beach, Va. and services 15 states, with a market concentration in the Mid-Atlantic and Southeast regions of the U.S. APP is headquartered in Tacoma, Wash. and sells its products and services primarily in the states of Washington and Oregon.

These two acquisitions of large, privately held petroleum distributors came shortly after World Fuel closed on its purchase of the equity interest in privately held Pester Marketing Co. and its wholly owned subsidiaries in the fourth quarter of 2015. At the time of the sale, Denver-based Pester Marketing owned a network of 57 convenience stores, two terminals and was a distributor of biofuels and lubricants to wholesale, commercial and agricultural customers.

Sunoco LP, through two wholly owned subsidiaries, completed the acquisition of 32 convenience store sites, a fuel distribution business and other related assets through two separate transactions in Texas and upstate New York in June. The MLP acquired 18 convenience store sites, five Subway locations, a Tim Hortons quick-serve restaurant and three undeveloped parcels of land from Watertown, N.Y.-based Valentine Stores Inc.

In a second transaction located in Texas, Sunoco LP purchased a motor fuel distribution business and 14 convenience store sites from Kolkhorst Petroleum Inc. The stores were branded Rattlers and operated in the Austin, Houston and Waco trade areas.

These closings were followed up shortly thereafter with the announcement of two other acquisitions. Sunoco LP agreed to purchase Emerge Energy Services LP’s fuels business for $178.5 million, subject to final working capital adjustments. The acquired fuels business operates two transmix processing plants in Texas and Alabama that can process more than 10,000 barrels of transmix per day and the associated terminals have more than 800,000 barrels of storage capacity.

Finally, in August, Sunoco LP announced it had agreed to purchase six convenience stores and fuel supply agreements with 127 wholesale dealers and approximately 500 commercial customers located in eastern Texas and Louisiana from Denny Oil Co. Inc. for approximately $55 million.

During Sunoco LP’s recent earnings call, CEO Bob Owens said the partnership would continue to be on the lookout for opportunities to add well-run assets in attractive trade areas and take advantage of the fragmented nature of the industry to drive growth for its unitholders. However, Owens acknowledged the partnership would like to lower its overall level of leverage and, as a result, this objective was causing it to be more selective in the M&A area for the time being.

Florida-based private investment firm, Sun Capital Partners, decided to reenter the C&G industry in May by completing the acquisition of 130 Admiral-branded convenience store sites and nine Lemmen-branded retail locations from the privately held Lemmen Oil Co. and Admiral Petroleum Co. All the locations are in the Midwest section of the U.S.

The companies did not disclose the terms for the purchase of the two related convenience store businesses, but as is common in many private transactions, most of the family members exited the industry after the closing.

Sun Capital originally entered the C&G industry in 2006 through the purchase of the Marsh Supermarkets chain that also included a network of convenience stores. The investment firm subsequently completed a series of additional acquisitions of convenience store sites from 2006 to 2013 and eventually consolidated all the assets to form the VPS Convenience Store Group. By 2013, the VPS Group grew to include more than 400 retail sites throughout the Midwest and Southeast sections of the U.S. Sun Capital monetized its investment by selling all of its assets to Richmond, Va.-based GPM Investments LLC in two separate transactions that closed in August 2013 and the first quarter of 2015.

It will be interesting to see how quickly Sun Capital will expand its latest retail platform in the C&G industry and what will be its long-term exit strategy.

Editor’s note: The opinions expressed in this column are the authors’ and do not necessarily reflect the views of Convenience Store News.