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    Waning Days of Summer Are Hot for C-store M&A

    And the industry shows no signs of cooling off in activity yet.

    By John C. Flippen Jr. & John Sartory, Petroleum Capital & Real Estate LLC

    While preparing our latest update on the merger and acquisition (M&A) market during the waning days of summer, the marketplace in the convenience and gas station (C&G) industry was certainly showing no signs of cooling off.

    Alimentation Couche-Tard Inc. just announced its mega-merger with CST Brands Inc. in a deal valued at $4.4 billion. The planned transaction represents the largest merger and acquisition that the company has ever completed.

    But before detailing this and other deals, let’s focus on the Brexit effect on global interest rates, United States central bank policy, the shifting corporate landscape, and select commentary from leaders in the industry.


    The Bank of England (BOE) announced shortly after voters in the United Kingdom decided in June to exit the European Union (Brexit) that it would commence with a new and aggressive program of monetary quantitative easing to lower market interest rates in the U.K. and hopefully stimulate the British economy. The BOE is basically betting that its new monetary program will offset the anticipated negative economic impact of the uncertainty surrounding Brexit.

    The BOE’s action was just the latest in a series of monetary policy initiatives coming from European central bankers that quickly led to another fall in global interest rates. This downward movement in rates was the most recent sign of how central bank policies in the developed world are interrelated and have intensified a worldwide collapse in borrowing costs.

    The 10-year treasury yield in the United States has dropped from 2.27 percent on Dec. 31, 2015 to a historic low of 1.37 percent on July 8, 2016. The Wall Street investment bank, Morgan Stanley, recently predicted the rate may drop to 1 percent before the end of the year.

    The most startling news relating to these polices is that the total global volume of sovereign and corporate bonds with negative nominal yields now exceeds $12.6 trillion, according to data assembled for the Financial Times by the financial services group Tradeweb. This figure represents almost half of all debt in the western world.

    These international events are occurring as U.S. Federal Reserve Chairwoman Janet Yellen and the other members of the Federal Open Market Committee (FOMC) continue to debate and worry about the possibility of finally raising short-term interest rates in 2016 by a meager 25 basis points before the end of the year. This year started with many financial experts and the futures market predicting the Fed would most likely raise its short-term benchmark interest rate, the federal-funds rate, by 100 basis points by the end of 2016.

    The reality for the Federal Reserve is that it is hard to raise interest rates in a world where everyone else is cutting rates and overall economic growth and demand is weak in the U.S. and elsewhere around the globe.

    While central bankers in the United States, Japan, United Kingdom and Europe continue to double-down on extraordinary monetary actions, many economic experts are starting to question whether ultra-low rates are really forcing households to save more of their income, not spend more. In addition, numerous financial experts and political leaders are starting to suggest that negative real interest rates in most of the developed world have inspired in the business community confusion, risk aversion and, most importantly, only encouraged business consolidation. Many business leaders seem to lack the confidence needed to expand operations, invest in new plants and equipment, develop new products and create new jobs.  

    In this unprecedented and seemingly never-ending period of ultra-low interest rates, the safest path to growth for many businesses is to grow revenue by acquiring a market competitor.

    These overall market trends are certainly prevalent in many segments of the C&G industry.


    Listed below is a brief overview of some of the recently announced or completed acquisitions that have occurred in the C&G industry in the second and third quarters of 2016. The level of M&A activity in the industry has certainly picked up over the past two quarters, led by Alimentation Couche-Tard’s blockbuster announcement of its merger with CST Brands on Aug. 22.

    During Western Refining Inc.’s second-quarter earnings call, CEO Jeff Stevens reviewed its recently completed acquisition of Northern Tier Energy LP and announced that the newly merged company planned to greatly expand its combined retail operation in the Midwest and Southwest sections of the U.S. The newly merged network now includes 400 convenience stores that currently operate under the SuperAmerica, Giant, Mustang, Sundial and Howdy brand names and 114 franchised locations that operate under the SuperAmerica LLC trademark. Western Refining has the financial wherewithal to become one of the newest corporate players in the M&A marketplace if the company follows through on its CEO’s statement.

    BW Gas and Convenience Holdings LLC, an affiliated company of the private equity investment firm Brookwood Financial Partners LLC, announced that its growing chain of convenience stores that are currently concentrated in the Midwest section of the U.S. will be branded Yesway; introduced design plans for the new stores to the public; and discussed its goal of quickly upgrading the sites the company has already acquired.

    In addition, to add further credibility to its previously stated goal of acquiring between 600 and 1,000 convenience stores throughout the U.S. over the next several years, the company announced that Joe Petrowski, former CEO of Cumberland Farms and Gulf Oil, has joined the firm as a senior advisor and member of its executive committee.

    These moves may indicate one of the newest private equity players to enter the industry is really serious about developing a national convenience store brand and not simply focused on assembling a network of sites that can be quickly sold for a very nice return on its investment in a couple of years. Private equity players have come and gone in the C&G industry over the past several years. Only time will tell if this new investment group sticks to its stated strategic plan.

    In one of the most surprising announcements of 2016, privately held conglomerate The Guess Corp., which currently operates businesses that market such luxury merchandise as diamonds, fine art, yachts, private islands and jets, issued a press release in July stating that it planned to acquire more than 1,000 convenience store sites over the next 12 months. In order to ensure the acquisition program will be successful, the company is planning to offer above-market compensation rates to real estate brokers who can locate potential acquisition targets. In addition, the company promises to pay sellers their full asking price and guarantees a quick closing process that could be as short as 72 hours. In August, The Guess Corp. also announced it had selected Scott & Cormia as its exclusive architecture firm to design the new upscale convenience stores that will be acquired and remodeled by the company. These dual announcements were met with a certain amount of skepticism within the industry.

    TravelCenters of America LLC’s CEO Thomas O’Brien mentioned on the company’s second-quarter earnings call that given the current and ongoing seller expectations from a value standpoint, the company was going to be taking a break from its aggressive M&A activity over the past several years and concentrate on improving the performance of the 200-plus convenience store locations it has already acquired. The CEO also stated the company was willing to become more active again in the marketplace if pricing became more attractive. This decision is not too surprising given O’Brien’s comments in 2015 that multiples sought by sellers were out of whack in many instances, and the company would not overpay for future acquisitions.

    Alimentation Couche-Tard announced its planned merger with CST Brands in an all-cash transaction for $48.53 per share, which equaled a total enterprise value of $4.4 billion in U.S. dollars including net debt assumed. Market analysts are projecting that Couche-Tard has agreed to pay somewhere between 10-11 times CST’s trailing EBITDA, before including approximately $150 million to $200 million in post-closing synergies in the final acquisition calculation. The acquisition price represented approximately a 42-percent premium for CST’s stockholders based on the share price prior to the company’s announcement in March of this year that it would explore and review strategic alternatives to enhance stockholder value. Couche-Tard also announced the company entered into an agreement with Parkland Fuel Corp. to sell it a portion of CST’s Canadian assets after the merger for $750 million in U.S. dollars.

    Texas-based CST currently operates more than 2,000 locations throughout the United States and eastern Canada. In announcing this latest mega deal, market experts assume Couche-Tard won a bidding war that may have involved numerous private equity firms such as Apollo Global Management and Blackstone Group LP, 7-Eleven Inc., Marathon Petroleum Corp., OXXO Mexico (a subsidiary of FEMSA), and Lawson Inc.

    The two companies are planning to close the transaction in early 2017 and it is still subject to the approval of CST’s stockholders and regulatory approvals in the U.S. and Canada.

    Prior to CST Brands’ announced merger with Alimentation Couche-Tard, 7-Eleven and its wholly owned subsidiary SEI Fuel Services Inc. closed on the acquisition of 76 convenience stores in California and three in Wyoming from CST Brands for $408 million. This eye-opening acquisition price reflected 7-Eleven’s willingness to pay, on average, more than $5 million per site to expand its market share in the very desirable and high-margin California marketplace. The previously branded Corner Store sites are located throughout California, and the network extends from San Diego to San Francisco. The average per-unit purchase price paid by 7-Eleven indicates that the larger corporate consolidators are still willing to pay a high multiple for a strategic acquisition located in an attractive real estate market.

    By John C. Flippen Jr. & John Sartory, Petroleum Capital & Real Estate LLC
    • About John C. Flippen Jr. & John Sartory John C. Flippen Jr. and John Sartory are managing directors of Petroleum Capital and Real Estate LLC (www.PetroCapRE.com). The firm provides buy-side acquisition, refinancing, capital restructuring and select sell-side advisory services in the convenience and gas station industry. PetroCapRE has assisted clients in completing transactions valued at more than $2 billion. They can be reached at [email protected] and [email protected]

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