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Thursday, July 23, 2015

Financial Insight: MLPs and the M&A Marketplace
Three factors that could crush the current strong market

Source: CSP Daily News
By Jeff Kramer, Managing Director, NRC Realty & Capital Advisors

CHICAGO --The overall merger-and-acquisition market for convenience stores and gasoline stations is remarkably strong! The acquisition teams of the acquirers get larger, while asset divestitures, even for weak assets at large corporations, remain on the back burner.

If an asset gets sold, worry develops about how to replace it. Whatever happened to the old retail rules, such as “automatically sell your 10% lowest return sites and replace them with newer and better sites”? Maybe persistently low rates left over from the last recession and a free rein on consolidation have caused a change in strategy for some time to come. That raises the question: Are we now experiencing a “new normal”?

A Feeding Frenzy

Master limited partnerships (MLPs) have certainly added to the feeding frenzy. Considering they are relatively new to the retail and wholesale side of our world, there are quite a number of existing and potential MLPs looking at every deal. They frequently beat out longstanding traditional growth companies in our industry.

For those unfamiliar with MLPs, the U.S. Tax Code and subsequent interpretations allow MLP shareholders a tax deferral on income earned and dividends paid from qualified, usually energy-related activities. Most popular have been companies with steady, predictable earnings streams, such as pipelines, since they can pay out most of those earnings as tax-deferred dividends. Shareholders counting on income from dividends are particularly keen on the predictability. Wholesale mark-ups to dealers or operators are counted as qualified income, and these mark-ups have been improving along with overall retail margins the last few years, creating more interest in dealer buyouts and multiples. The remaining “retail” portion is non-qualified income, but still of interest to many retail-oriented companies, such as CST Brands Inc.

The end result is that MLPs have an inherent advantage competing in the acquisition world with a lower overall cost of capital, as reflected in the fact that the EBITDA multiples of their equities typically far exceed those of their parent companies. A good example is downstream Marathon Petroleum Corporation and its related midstream pipeline company, MPLX LP, whose multiple has consistently been much higher than its highly successful parent company.

The MLP equity world is going through its own shake up at this time, as reflected in its stock-market index called the Alerian MLP Index Trust (NYSE: AMZX). It has declined 26% from