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Monday, October 24, 2016

A Time to Buy, a Time to Sell

Source: CSP Daily News
By Mitch Morrison, Vice President & Retail Executive Platform Director, Winsight

ATLANTA -- The c-store space is up for grabs.

From Amazon’s brick-and-mortar foray into convenience to the invasion of capital-laden private-equity concerns, the channel is embroiled in tornado-swirling bluster.

But let’s not embrace hyperbole--mom and pops are not going away. But much like a neighborhood undergoing dramatic gentrification, the convenience-store channel faces a raze and rebuild like no other, with multi-billion-dollar traditional faces, master limited partnerships (MLPs) and venture capital behemoths crushing to get in.

For operators lacking a succession plan or fearing an end to the 18-month run of extreme profit, now may be the time to sell. For others eyeing expansion and salivating over cheap money, now may be the time to buy.

In a 2016 NACS Show session moderated by Dennis Ruben of NRC Realty & Capital Advisors called Mergers & Acquisitions: Where Will It End?, four former and current retailers who collectively have experienced the roller coaster of buying and selling addressed changes roiling the marketplace.

State of the C-Store Industry

Were this the annual presidential State of the Union address, the opening would be obvious: The state of the convenience industry is strong.

Profits are soaring, countless operators are borrowing at historically low rates and revamping their stores, hundreds, if not thousands, of tired sites are being replaced with new and expanded facilities featuring Wi-Fi, sit-down foodservice and broadened beverage offerings.

“I got into the retail business because I thought I could make money on it, and I’ve got a new appreciation of those who run it,” said Paul Reuter, the former longtime publisher of CSP who helped found the country’s largest 7-Eleven franchise group, Midwest Retail Group LLC, Milwaukee.

Joining Reuter on the panel were Rocky Dewbre, former executive at Susser Holdings Corp., Corpus Christi, Texas, and currently a board director at CST Brands, San Antonio; Jeff Kramer, managing director at NRC Realty & Capital Advisors LLC, Chicago, and a former fuels marketer; and Peter Tedeschi, chief strategic officer at Midwest Retail Group and former head of Tedeschi Food Shops, Rockland, Mass.

Why Sell?

Both Tedeschi and Dewbre understand the world of buying and selling. Tedeschi hails from a respected multi-generational family retail business established in the 1920s. And while the chain enjoyed a respectable run of growth through both acquisition and new-to-industry stores, Tedeschi and family sold the 182-store Tedeschi Food Shops last year to 7-Eleven.

In Tedeschi’s case, it was a heart-wrenching decision, but one that made financial sense for the extended family, many of whom are past retirement age.

“I went from wanting to buy the company to telling my wife we may not have the company in a few years,” he said, explaining how the company hired a third party to conduct a detailed diagnosis into the company’s current position and future options. Where he had eyed buying out a family member, in the end, the family concluded that favorable market conditions made it an opportune time to exit the retail space.

“The question became if not now, when,” Tedeschi said, citing the ancient proverb from the Jewish Talmudic sage, Hillel.

“Our company was not in the mode to being sold--we were actively growing,” Dewbre said of Susser, the outfit that had completed 18 acquisitions before it was purchased by MLP giant Energy Transfer Partners (ETP), Dallas, which earlier had acquired Sunoco.

“The offer was high enough where it made sense to do so,” said Dewbre.

MLPs

Though somewhat muted over the past year with the decline in energy prices, master limited partnerships--a form of publicly traded company that taps favorable tax advantages in the energy sector--have greatly affected the current convenience-store landscape.

In many cases, MLPs have spiked transaction multiples, drawing on their ability to perhaps overspend in order to deliver quick returns to its unit-holders (akin to investors).

“Master limited partnerships have had quite an impact,” said Kramer, who has spent the past few years studying MLPs and who has contributed columns to CSP Daily News on the subject.

Indeed, from the fourth quarter of 2014 through the third quarter of this year, the industry has witnessed 29 deals involving the sale of at least 50 stores. Of those, nine deals were executed by MLPs; 18 by major industry players like GPM, Alimentation Couche-Tard and Empire Petroleum; and two deals by private-equity groups.

Acknowledging that the MLP bubble has deflated somewhat over the past 18 months, Kramer said, “There are many that are extremely strong and well-managed,” and that he expected more MLPs to rise once energy markets improved.

Multiples

Companies selling for 13x or 14x EBITDA (earninge before interest, taxes, depreciation and amortization)? Well, with cheap money, favorable tax advantages for MLPs and oftentimes more buyers than sellers, the market has been generous.

Or perhaps not as much as we believe. Ruben and the four retail panelists delved into the accuracy and veracity of multiples.

It’s difficult to obtain accurate data on multiples, said Dewbre. “Multiples are at an all-time high,” he acknowledged. But he and others cautioned the standing-room crowd of retailers not to enter a fool’s gold.

They explained that the term “multiples” carries different nuances depending on the kind of seller and buyer--and are greatly affected by asset quality and geographic density. Some base multiples on a three- or five-year company average. Others calculate it on per-store results rather than the total chain. Others look at it from both pre- and post-general and administrative (G&A) savings.

Regardless of the precise determination on multiples, all agreed the convenience channel is riding an impressive run, making it both an opportune time to buy and sell.

“Overall, the market is still healthy,” said Kramer, “albeit the market is probably not as strong as it was.”

Reuter, noting there are more buyers than sellers, added, “Today is a really good time for our industry.”

The Big A

The convenience world shook when Amazon, the world’s largest digital retailer, announced it would open its first brick-and-mortar convenience store.

Will Amazon face similar unimpressive results as Home Depot and other big-box players who sought to expand their presence via a smaller footprint?

Reuter urged retailers not to be intimidated or frightened. “There’s always [been] a scary something. Our industry has always come through the dark clouds and found the sunshine.

“I don’t get scared off by the headlines.”