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Thursday, May 4, 2017

Sunoco Eyes Substantial Retail Exit by Fourth Quarter
Future M&A activity would be around fuel

Source: Convenience Store News
By Melissa Kress

Robert Owens, president and CEO of Sunoco LP DALLAS — Sunoco LP will look like a different company come the end of this year.

With a pending sale of more than 1,000 convenience stores to 7-Eleven Inc. and hundreds of more stores still on the sales block, Sunoco "will have substantially exited the retail convenience store space in the continental United States by the end of 2017," Bob Owens, president and CEO of Sunoco LP, said during the company's first-quarter earnings call Thursday.

On April 6, Sunoco announced a definitive agreement with 7-Eleven to sell approximately 1,110 company-operated convenience stores, as well as the trademark and intellectual property of The Laredo Taco Co. and Stripes, for $3.3 billion, as CSNews Online previously reported.

As part of this transaction, the two companies also agreed to enter into a 15-year, fixed-rate, take-or-pay fuel supply agreement under which Sunoco will provide base volumes of approximately 2.2 billion gallons per year with committed growth of 500,000 gallons over the first four years.

"This is a transformative first step in a decision to divest convenience stores in the continental United States," Owens said. "7-Eleven is a creditworthy strategic partner and with the 15-year fuel supply agreement, Sunoco will look to build on this partnership as we also build our partnerships with best-in-class dealers and distributors."

Sunoco will continue to utilize its diverse channels of trade and fuel brands, he added.

"This credit-enhancing transaction will allow Sunoco to capitalize the balance sheet and sets the stage for strategic optionality targeting MLP-qualified income," Owens explained, noting the deal is expected to close by the fourth quarter, subject to regulatory approvals.

More Sites On The Auction Block

Simultaneous to this deal, Sunoco has retained J.P. Morgan Securities LLC to sell an additional roughly 200 c-stores across north and west Texas, as well as in New Mexico and Oklahoma.

"These stores are favorably positioned in the heart of the Permian Basin with exposure to above-average economic growth in that region," Owens said. "While heavily exposed to the energy sector, this geography also contains diversified industry such as education and agriculture, which can help provide more consistent levels of sales and profitability through the cycles."

According to the chief executive, the average store in this group is approximately 3,800 square feet and built on 1.5 acres. About 20 percent of these sites are new-to-industry stores built since 2008; 70 percent of the locations have a fast-casual restaurant, with the majority being The Laredo Taco Co. concept.

"We are encouraged by the initial response from bidders and also anticipate closing on this transaction by the fourth quarter," he said.

Additionally, in January, Sunoco retained NRC Realty & Capital Advisors LLC to sell approximately 100 assets in Florida, Louisiana, Massachusetts, Michigan, New Hampshire, New Jersey, New Mexico, New York, Ohio, Oklahoma, Pennsylvania, Rhode Island, South Carolina, Texas and Virginia.

To date, approximately 30 percent of the active retail sites from the initial NRC process have migrated over to the 7-Eleven transaction, according to Owens. Another 20 percent of the active retail sites have been awarded to outside bidders, and approximately 10 percent have migrated to the marketing efforts underway by J.P. Morgan.

"Relative to where we have been in recent history, I think the completion of this transaction, and resulting improvement in balance sheet, positions us much better, with a better cost of capital for competing for [merger-and-acquisition] assets," Owens said.

As for the type of assets Sunoco will be after, "this is an exit of company-operated convenience stores in the continental United States and that will make sense for us as we remove all the costs associated with running those types of businesses," he explained. "So, as we look at M&A activity in the future, it will be around the fuel side — dealer, distributor type assets. Might there be company ops that we would purchase with the intent of converting over to other classes of trade? Sure, if it made economic sense."

More midstream assets have "high appeal" to Sunoco as well, he noted.

Dallas-based Sunoco LP is a master-limited partnership that operates convenience stores and retail fuel sites and distributes motor fuel to convenience stores, independent dealers, commercial customers and distributors located in 30 states. Its parent company, Energy Transfer Equity LP owns Sunoco's general partner and incentive distribution rights. As of March 31, Sunoco operated 1,355 convenience stores and retail fuel outlets along the East Coast, in the Southwest, and in Hawaii. Third-party wholesale customers totaled 7,825.