Will CST Follow Same Path as The Pantry?

SAN ANTONIO — Could CST Brands Inc. be destined to follow the same fate as The Pantry Inc., which came under shareholder pressure, added new members to its board of directors, and then put itself up for sale?

There are certainly several similarities between what's currently happening at CST and what transpired with The Pantry, making it possible that CST could eventually be sold to another large convenience store operator, à la when Alimentation Couche-Tard Inc. purchased The Pantry in 2015.

The similarities start with the fact that investment firms owning shares in the c-store retailers expressed concerns about their operations and asked for changes to be made. In fact, one investment firm, JCP Management LLC, has been involved in both situations and both times, JCP nominated board of director candidates to each respective board.

In The Pantry’s case, shareholders voted to elect three JCP-backed board of director nominees on March 13, 2014. Nine months later, on Dec. 18, 2014, Couche-Tard announced it would acquire The Pantry for approximately $1.8 billion.

This time around, CST on March 3 of this year agreed to add two JCP-backed members to its board: Thomas “Tad” Dickson, who also served as chairman of the board at The Pantry before it was sold, and Rocky Dewbre, a former longtime Sunoco LP executive. In turn, JCP and fellow investment firm Engine Capital LP agreed to withdraw further names for consideration at CST’s annual meeting of shareholders to take place in June.

This month, CST also announced it is commencing an “exploration of strategic alternatives to further enhance shareholder value.” The review process will be comprehensive and include a “fresh look” at several of CST’s previously announced initiatives, such as its new real estate venture.

“We believe there continues to be a disconnect between CST’s intrinsic value and the price of our common stock in public equity markets,” stated Kim Lubel, chairman, president and CEO of CST Brands. “For this reason, our board of directors is initiating a process to explore and evaluate a wide range of strategic alternatives to maximize value for our shareholders.”

This news gave CST’s stock a tremendous one-day boost, lifting shares more than 14 percent on March 4, the first trading day after CST announced the news.

Despite the new board members and strategic review, that doesn’t necessarily mean CST’s alleged deficiencies will be immediately solved to the satisfaction of investors. Both JCP and Engine Capital recently cited the retailer’s weakness in operations — specifically, merchandise sales and organic growth — as two places where CST must improve. The firms expressed dismay about CST’s share price since being spun off from Valero Energy Corp. in 2013. Despite the large one-day stock jump, these firms may still believe CST’s stock performance has been deficient compared to publicly traded industry competitors such as Casey’s General Stores Inc.


Convenience Store News posed the question of a CST sale to several industry insiders. There was some difference in opinion.    

Were CST to be put up for sale — as some feel will be the ultimate destination for the company — Couche-Tard, Marathon Petroleum Corp.’s Speedway LLC division and Sunoco have all been rumored to be potentially interested. The c-store retailer’s market capitalization currently is about $3 billion. Considering any acquiring company would need to pay a premium (The Pantry received a 27-percent premium over what its stock traded for the day prior to announcing its intention to sell), CST could command a final acquisition price of $4 billion.

However, Terry Monroe of American Business Brokers & Advisors, based in Effingham, Ill., believes CST’s future will differ from The Pantry in one major way: It will not be sold.

“I don’t think this will be a situation like The Pantry,” Monroe said. “CST is a good operator and does many things very well.”

CST will make major changes, most notably in its operations philosophy, Monroe predicted.

“CST is very good at executing acquisitions,” he said. “But the real struggle for companies that make acquisitions is the execution of operations. They just need to bring in strong people on the operations side."

Likewise, John Flippen Jr., managing director of Petroleum Capital & Real Estate LLC, does not expect CST to be sold outright in the future. “Valero is still a major shareholder of the company, and I think they still want exposure to downstream assets," Flippen noted. "Valero wants a place where it knows it can sell its fuel to.”

Flippen believes the avenue CST will take is selling underperforming assets, a process that has already begun in California, as evidenced by Lubel’s announcement on Nov. 14 that the company would conduct a “California Network Strategic Review” in an effort to sell off 76 company-operated c-stores in the Golden State that do not fit the company’s business model.

Flippen believes this is only the beginning, as the company will sell many more underperforming assets in the future.

Bonnie Herzog, managing director of beverage, tobacco and convenience store research for Wells Fargo Securities LLC, also echoes that CST can improve its operational performance, which has been its Achilles heel to date.

“We have long viewed CST’s inferior merchandise performance as an opportunity, as there represents a long runway of growth, both in [same-store sales] and margins, through key initiatives," she commented. "Having said that, we give management credit for the sequential improvements it has been making.” 

San Antonio-based CST Brands operates more than 2,000 c-stores in the southwestern United States, Georgia, Florida, New York and eastern Canada.

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