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Thursday, March 3, 2016

Why Now Is ‘Perfect Storm’ for C-store Industry M&A

Source: Convenience Store News
By Tammy Mastroberte, Contributing Editor

There’s more sellers than ever before.

NATIONAL REPORT — The past year has seen several long-standing convenience store chain operators suddenly selling off their assets and exiting the business altogether. Why?

According to Dennis Ruben, executive managing director of Chicago-based NRC Realty & Capital Advisors LLC, it is the “perfect storm of circumstances.”

“There are low gas prices, but also record margins. People are seeing margins they have not seen in a long time on fuel, so they are making more money. Customers are also spending more money in the store because gas prices are so low,” he told Convenience Store News.

This has piqued the interest of buyers — and not just those in the c-store industry — and hence, large amounts of money are on the table.

Companies that were thinking about selling in the past have realized with interest rates as low as they are, the offers coming in now for their businesses will not last forever.

“With the numbers being presented, it would be foolish not to think about it,” said Ruben. “People are looking at the market and the numbers, and are not sure it will be like this again. Interest rates will go up soon, so the time couldn’t be better to sell.”

Also, statistics show 10,000 baby boomers are retiring every day and that includes some convenience store owners. Operators contemplating retirement are taking the opportunity to get out sooner rather than later, noted Terry Monroe of American Business Brokers & Advisors, based in Effingham, Ill.

“They are now seeing they can get more money for their chains than they ever thought possible,” Monroe said.

Sellers are getting offers higher than they have seen in years, particularly as large private equity firms are acquiring more c-store industry assets than in the past. One example is Fortress Investment Group Inc., which owned United Oil Co. and purchased Pacific Convenience & Fuels in June of last year to form the new United Pacific.

“Right now, money is cheap, and it will never get this cheap again,” Monroe explained. “We are getting a lot of calls from real estate equity companies and financial buyers that want to invest in a cash business that is still growing and can give great returns. The c-store business fits that [criteria].”

There’s stronger buyers than ever before.

While increasing consolidation in the convenience store industry is being driven by more sellers in the market than ever before, also sharing the wheel is stronger buyers than ever before — particularly large chains that are just getting larger.

The majority of buyers that are scooping up small and mid-sized chains lately are the largest convenience store chains, as well as private equity firms. These two groups have the cash to spend and, as a result, are outbidding mid-sized chains for available assets.

“Major industry players are going into new markets and expanding rapidly, and someone with only 50 stores can’t afford to pay what they can,” Dennis Ruben, executive managing director of Chicago-based NRC Realty & Capital Advisors LLC, told Convenience Store News. “A mid-size chain can’t just write a check, compared to big chains who are able to bid a lot of money and don’t need any financing.

“It’s the same eight or 10 people bidding, because they are the ones who can just write a check and can compete with the prices,” Ruben continued.

John Flippen Jr., managing director of Petroleum Capital & Real Estate LLC, says this all started with the major oil divestures in 2008 and 2009. Ever since then, sales have been happening at an increased rate.

Now, it’s about the rise of the master limited partnerships (MLPs) and the larger regional players. Of the past 28 deals facilitated by his Maryland-based firm, MLPs purchased 19 of them and private equity firms bought two, according to Flippen.

“Chains like CST Brands, Sunoco, Couche-Tard and 7-Eleven are buying whatever large chains they can find because they need to scale,” he said, pointing to 7-Eleven Inc.’s recent acquisition of more than 100 stores in South Florida and its purchase of the 180-unit Tedeschi Food Shops in New England.

However, buyers are not only looking at large chains. Those previously limiting their transactions to chains with 50 or more stores are now expanding their scope to look at everything available in hopes of beating out the competition.

“Big players are now saying we want to see every deal, big or small. They are looking at deals they didn’t before because it makes sense to buy defensive,” Ruben said.

Strong buyers means more money on the table for sellers. With the combination of record profit margins, low interest rates and large private equity firms acquiring more c-store industry assets than in the past, sellers are getting offers higher than they have seen in years.

Flippen, though, said he doesn’t see prices going any higher than they are now. So, while the industry will continue to consolidate, eventually interest rates will increase and things will slow down a bit.

“The price of oil has dropped and margins have expanded, so there is a lot of cash and capital available to purchase assets,” said Flippen. “This won’t continue forever, but the consolidation isn’t going to end.”

The “feverish” trend of buying is projected to continue for at least another six months before tapering off, according to NRC’s Ruben. Eventually, the majority of the c-store industry will be comprised of very large chains on one end and lots of single-store owners on the other end.

“We will see increasing consolidation, where six or eight companies control one-third of the c-stores,” Ruben concluded.