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Wednesday, April 27, 2016

Insider’s View: Q1 2016 M&A Review
A slower quarter sets up the industry for possible blockbuster deals

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

SCOTTSDALE, Ariz. – Although there wasn’t a great deal of merger-and-acquisition activity in the convenience-store industry during the first quarter of 2016, there certainly was a significant amount of controversy suggesting some major deals could be coming.

A great deal of attention was focused on CST Brands Inc. and two vocal activist shareholders, JCP Investment Management and Engine Capital LP. Those shareholders made public their concerns about the undervaluation of the stock price of CST and their views on what should be done to maximize shareholder value.

Some of the proposals made by the activist investors included adding more experienced industry professionals to the board of directors, exploring sale-leaseback alternatives and evaluating the merits of the sale of the entire company to a larger industry player. CST responded fairly quickly by shaking up its senior-management ranks, hiring investment bankers to explore strategic alternatives, including a possible sale of the company, and agreeing to add two members to its board of directors who were supported by the activist shareholders. Although it is not clear what the future holds for CST Brands, many industry observers are predicting that CST will ultimately be sold. We will watch this drama carefully as it continues to unfold.

In the meantime, rumors started circulating that Energy Transfer Equity LP, parent company of Energy Transfer Partners LP, was considering the sale of its convenience-store subsidiary Sunoco LP. However, senior management at Sunoco immediately and emphatically denied that a sale of the retail assets was under consideration by the company.

It seems this is the season for rumors and speculation that, in my judgment, are counterproductive and add no real value to the objectives that the companies in the industry are trying to achieve. However, it makes for interesting reading.

Here’s a look at deals that did go down during first-quarter 2016:

Alimentation Couche-Tard/Circle K

In February, Alimentation Couche-Tard Inc., No. 2 on CSP’s convenience-store Top 101, closed on the acquisition of Topaz Energy Group Limited in Ireland. Topaz was the leading convenience and fuel retailer in Ireland with 444 gas stations, including its recently acquired Esso c-store network. Of these stations, Topaz operates 158 and dealers operate 286. The agreement also included a commercial fuels operation, with more than 30 depots and two terminals. Couche-Tard announced that it will rebrand the Topaz stores, including the Esso locations, with the new global Circle K brand.

Couche-Tard, based in Laval, Quebec, also announced that it agreed to purchase, through its subsidiaries, 279 convenience-store locations in Canada from Imperial Oil. Of these sites, 229 are in Ontario (189 in the Toronto area, 16 in the London area and 24 in the Ottawa area) and 50 are in Quebec in the Montreal area. The agreement also includes 13 land banks and two dealer sites, as well as a long-term fuel supply agreement for Esso fuel. At closing, Couche-Tard’s network in Canada will consist of more than 2,100 c-stores.

CST Brands Inc./CrossAmerica Partners LP

In March, CrossAmerica Partners LP closed on the previously announced purchase of 31 franchise Holiday convenience stores located in Wisconsin and Minnesota from SSG Corp. for $48.5 million. Of these sites, 28 are located in Wisconsin and three are in Minnesota. All but four of the sites are fee simple locations.

San Antonio-based CST Brands Inc., No. 5 on CSP’s convenience-store Top 101, announced that it closed the previously announced $425 million acquisition of the Flash Foods convenience-store network from The Jones Co., which operated 165 convenience stores in Georgia and Florida.

7-Eleven Inc.

Irving, Texas-based 7-Eleven Inc., the No. 1 chain on CSP’s convenience-store Top 101, announced that 7-Eleven Canada Inc. agreed to acquire 148 convenience stores and fuel sites from Imperial Oil in British Columbia and Alberta, including in the metropolitan areas of Vancouver, Calgary and Edmonton. After the closing, 7-Eleven will continue to market Esso-branded fuel supplied by Imperial and will remodel and convert most of the stores to 7-Eleven.

Other Notable M&A Transactions
  • Petroleum Marketing Group Inc., No. 61 on CSP’s convenience-store Top 101, closed on the acquisition of 223 dealer-operated convenience stores formerly owned by Gulf Oil LP. The sites are in the Northeast and Mid-Atlantic regions, extending from Pennsylvania to Maine. Large concentrations of the sites are in the greater metropolitan areas of Boston and New York and on Long Island.
  • Richmond, Va.-based GPM Investments LLC, No. 11 on CSP’s convenience-store Top 101, acquired 42 Apple Market convenience stores with gasoline and approximately 20 dealer-operated stores in southwestern Virginia and eastern Kentucky from Fuel USA. GPM also obtained ownership of 15 convenience stores with gasoline in southern Illinois, Iowa and Nebraska from Gas-Mart USA Inc. This acquisition was a part of a court-ordered bankruptcy auction of the assets of Gas-Mart.
  • Chester, Va.-based Uphoff Ventures LLC expanded into Key West and Homestead, Fla., with the purchase of 11 Dion’s Quik Marts convenience stores from Dion Oil Co.
  • Brookwood Financial Partners, Beverly, Mass., entered into a preliminary agreement to acquire 24 convenience stores in Iowa and one in Nebraska from Kum & Go L.C. Brookwood’s affiliate BW Gas & Convenience Holdings LLC will operate the convenience stores.
  • Westlake, Ohio-based TravelCenters of America LLC, No. 23 on CSP’s convenience-store Top 101, completed the acquisition of four Meiners’ Market convenience stores in Kansas and Missouri from Meiners Corp. TravelCenters of America said it intends to rebrand the newly acquired stores as Minit Marts.
Growth Initiatives
  • Wawa Inc., No. 14 on CSP’s convenience-store Top 101, is actively looking for sites in the Jacksonville, Fla., area, according to reports. The Wawa, Pa.-based chain currently has 87 convenience stores in Florida and has plans to open 100 more by 2019.
  • Tesoro Corp., San Antonio, is advancing a new retail strategy and announced that it plans to nearly double the EBITDA of its retail and gasoline-marketing business to more than $1 million in the next three years through convenience-store improvements and acquisitions. With a base of 2,300 dealer locations, Tesoro aims to add another 350 retail locations by 2018 and 550 by 2020. Tesoro also announced that it has signed a strategic supply agreement with an affiliate of Anabi Oil Corp., Upland, Calif., to sell fuel at 55 high-volume gas stations in the greater Las Vegas area that Anabi acquired from Las Vegas-based Rebel Oil in December.
  • North Salt Lake, Utah-based Maverik Inc., No. 35 on CSP’s convenience-store Top 101, announced that it expects to open 26 new convenience stores around the intermountain West. The aggressive growth plans include expansion into the Las Vegas, Denver and Spokane markets.
Conclusion

Although the first quarter was relative quiet in the M&A realm, major industry players either announced or closed some significant transactions. This trend is expected to ramp up in the remaining quarters of the year.

Many large transactions were completed last year, and it doesn’t seem as if there are nearly as many large acquisition candidates out there. In addition, with high fuel margins and lofty merchandise sales, many operators have been experiencing record profits and are reluctant to give those up at the present.

Many of these same operators believe that they will be able to continue these record profits, wait a year or two, then sell their companies and still achieve double-digit EBITDA multiples for their companies or portfolios.

With the spotlight now shining more brightly on the multiples being paid for acquisition targets by public companies, as well as the effect of low oil prices, the days of eye-popping multiples may have seen their zenith other than for strategic or very large acquisitions that “move the needle” for the acquiring company. That will remain to be seen in the months ahead.