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Wednesday, October 22, 2014

Insider’s View: C-Store Industry Consolidation Continues to Accelerate

Source: CSP Daily News
By Dennis L. Ruben, Executive Managing Director, NRC Realty & Capital Advisors LLC

SCOTTSDALE, Ariz. -- The third quarter of 2014 witnessed the escalating pace of merger-and-acquisition activity in the convenience-store industry. It was difficult to imagine that any new shockwaves could be sent through the industry after the two “game changing” merger-and-acquisition transactions in the c-store industry were announced during the second quarter—the acquisition of Susser Holdings Corp. by Energy Transfer Partners LP and the acquisition of the retail assets of Hess Corp. by Marathon Petroleum Corp.’s Speedway LLC subsidiary. However, a number of transactions were announced during the third quarter that surprised industry observers and analysts alike.

Although it is difficult to determine the precise purchase price multiples paid for Susser and the Hess retail assets from the public filings, it is clear that both of these companies were sold for double-digit multiples. These transactions also signaled a further evolution of the consolidation of the convenience-store industry.

It now appears that the pace of consolidation will continue to accelerate, and that the likely purchasers for quality convenience-store companies and portfolios of assets fall into two categories: the master limited partnerships (MLPs) such as Energy Transfer Partners LP (ETP) and Marathon, and the more traditional owner/operators such as Circle K and 7-Eleven. However, these notable second-quarter transactions, as well as the transactions that were announced in the third quarter, support the notion that the MLPs seem to be “winning the day” in terms of making the highest offers and acquiring the most attractive companies and assets.

The tax advantages and apparent lower cost of capital of the MLPs allow them to stretch further in terms of the prices they are willing to pay, which clearly gives them an edge in the marketplace.The M&A activity in the third quarter of 2014 only serves to reinforce the notion of the predominance of the MLPs.

In a very surprising move that caught industry observers and analysts off guard, CST Brands Inc. announced that it was acquiring the general partner of Lehigh Gas Partners (LGP) and certain other rights for $85 million in cash and stock. Obviously, a key motivation for CST Brands was to acquire an MLP structure so as to compete more effectively with the other entities that have been able to take advantage of that structure.

Shortly after that transaction was made public, CST Brands announced that it had entered into an agreement to acquire all of