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    Quiet Buyer Making Waves

    When news of Delek US Holdings Inc.'s pending purchase of 107 Favorite Markets for $65 million broke in mid-February, a typical industry reaction was, "Wow. I didn't even know those stores were for sale."

    When news of Delek US Holdings Inc.'s pending purchase of 107 Favorite Markets for $65 million broke in mid-February, a typical industry reaction was, "Wow. I didn't even know those stores were for sale."

    That's just how Uzi Yemin likes it. The president and CEO of soon-to-be 500-store Delek US has overseen the company'sgrowth from the April 2001 birth of Israel-based Delek Group Ltd., a publicly traded conglomerate whose core business is fuel supply. (In Hebrew, "Delek" means "fuel.") Delek US's initial purchase of 198 MAPCO Express convenience stores fromThe Williams Cos. gave the new player a strong foothold in the Nashville and Memphis, Tenn. and Little Rock, Ark. markets. Since then, the company haspurchased stores to become the number-one operator, in terms of units, in Nashville, Memphis and northern Alabama. The purchase of the Favorite Market stores from Calfee Co. of Dalton Inc. will make Delek US the largest operator in the eastern Tennessee/ northern Georgia area, too.

    "I enjoy the fact nobody mentions our name before a purchase," Yemin told Convenience Store News in an exclusive interview. "That's how we get chains that are not on everyone's radar. There was no auction for the chains we purchased.

    "Even though we are a public company, we are private people. We like to keep the sellers informed and we negotiate in good faith. We feel the right approach is not to make a lot of noise before you do a deal — just do the deal.

    The Delek US team is determined to add stores in current markets and beyond through acquisitions, new builds and rebuilds in the image of its upscale, MAPCO Mart prototype (profiled in the Aug. 7, 2006 issue of CSNews). The year-old concept is centered on Grille Marx, a foodservice program comparable to a fast casual restaurant's offer. All of the food – including wraps, signature cheese steaks, hoagies, grilled panini sandwiches, fries, onion rings and more – is prepared in front of customers and typically made in three minutes or less.

    CSNews recently spoke to the Delek US executive team – Yemin, COO Lyn Gregory, vice president and treasurer John Colling and vice president of marketing for MAPCO Express Inc. Paul Pierce – about the strength of this fast-growing company and how it is solidifying its competitive position.

    CSNews: Delek Group holds the largest natural gas reserve in Israel and operates the second-largest c-store chain there. Why come to the United States?

    Yemin: Delek Group's board of directors sent me here to diversify the business outside Israel. In 01, 02, no one wanted to be in the c-store business. A number of big chains were going through bankruptcy: Convenience USA, Swifty Serve and others. We thought, "It's a great time to get into the business!"

    CSNews: How would you characterize the company's first six years?

    Yemin: The Williams Co. wanted to get out of the business, and we bought them for a very good price. Then we bought East Coast and were at 234 stores for a while. (See "A History of Good Buys," Fig.1, Page 30.) We implemented our IT, marketing, accounting and operations strategies and saw great results.

    In 04, another not-so-good year for the c-store industry, we purchased Discount Food Marts, which brought us to 332 stores. In early 2005, we were looking for a complementary business – no one wanted to touch the refinery business then– and we said, "This must be a great business to be in now!" and we bought the refinery.

    Then, 05 and 06 ended up being very good years for the convenience store and refinery businesses. We bought our refining assets for less than 10 cents on the dollar, based on replacement costs, and now they have become very valuable. We took the company public last year, and our market value is now close to $900 million.

    CSNews: Why was the time right for Delek US's IPO last year?

    Yemin: Delek Group's equity is around $2 billion. Initially, we had $41 million in equity and Delek Group could have supported us in our growth plan. However, we were outgrowing that company. We have kept our profits here in the U.S. to fuel our growth, but we felt we needed more fuel from another source.

    CSNews: Why was the purchase of the refinery and terminals important? Why not stick to retailing only?

    John Colling: Our objective has always been to be a diversified energy business, with refining, terminals and pipelines and c-stores. It just so happens that we established our presence in c-stores first. For our refining business, we are looking at a number of different projects to boost profitability over the next few years. We want to grow all three segments of the business.

    CSNews: As you've grown so quickly, have you thought much about the U.S. chains that grew quickly through acquisitions in the past and ultimately failed?

    Yemin: At the end of September, we had net debt of $105 million. For a company that made nearly $200 million EBITDA (earnings before interest, taxes, depreciation and amortization) in the last 12 months as of September, if anything, we are under-leveraged.

    CSNews: What do you look for in acquisitions?

    Yemin: We're looking for stores we can improve. We get a lot of phone calls from chains that want to be sold. We will keep growing this way.

    CSNews: At the same time, you are rolling out your MAPCO Mart prototype, a much larger, upscale store with an emphasis on your Grille Marx in-store restaurant. You have 10 now in the Nashville market. What are your plans for this year?

    Lyn Gregory: We are rationalizing all of our properties to see which ones are the best fits for the MAPCO Mart and the Grille Marx concepts. If we have to increase the size of the lot to make it work, we are going after the adjacent property. Our first initiative is to do as many raze-and-rebuilds as possible. But, we are going to all the existing stores and putting in our new coffee program and are upgrading select stores' interiors to the MAPCO Mart graphics.

    There are a few sites that may not fit into our plans, and we would consider selling them to a dealer, through our dealer operation. (Note: The chain supplies 78 dealer locations.)

    Paul Pierce: We have tweaked the original prototype, which was 5,500 square feet, to make it smaller. New buildings are less than 4,200 square feet.

    One was just built on 0.9 acre. If we can put them on smaller parcels of land, we can pick more existing sites to raze and rebuild. We can take space from a number of areas. If we are adjacent to a shopping center, for instance, we can put employee parking there. We can eliminate outside seating or eliminate one or two pumps. Inside, we may lose one cooler door, shrink space down here or there.

    CSNews: How are the new MAPCO Marts being promoted and marketed?

    Pierce: We've done a lot of sampling of our Grille Marx food at the pump and to local businesses. And we've distributed a lot of coupons. We may approach stores near businesses by catering to the lunch crowd and trying to do platters. We'd hit that consumer differently than a breakfast crowd or dinner crowd. We will target customers differently in each location.

    CSNews: You're working hard to quickly establish a new image across the chain, yet you don't believe in cookie-cutter stores, do you?

    Pierce: It's a delicate balance. Our philosophy will always be to look at the audience around the store when selecting and pricing products.

    We are trying to expand our customer base without alienating the core customer, which is an even more delicate balance. We are looking to be the neighborhood store, with unique features that cater to that store, even if it that store is on the interstate, catering to the traveling public, or near a ballpark or school. Beyond the typical c-store items that won't change, we have to identify the personality of each location and cater to that all under our new, upscale store concept

    CSNews: How does the new MAPCO Mart appeal to more people, specifically women and professionals?

    Gregory: When we first decided to develop MAPCO Mart, we hired a company to help us benchmark against everybody in the Southeast. Now, you won't see anything comparable to it.

    Pierce: We have more produce, an intense focus on fast food and fountain beverages, more hot beverages, more opportunity to customize through things like flavor shots at the fountain. We are constantly tweaking the merchandise to distinguish us from the competition.

    CSNews: How do you differentiate yourself from your rivals, considering every c-store carries the same brands of candy, snacks, cigarettes and beer.

    Pierce: Most people in this industry work in a comfort zone and do what they have been doing with blinders on. Our challenge is to see beyond those blinders to great ideas and opportunities. Pioneers had to forge the trail. In essence, that is what we feel we are doing.

    We have to find new product categories that haven't been done in this business before. Find products and distributors that haven't been in the c-store business and educate those manufacturers about how we like to do business and be educated in how they do business.

    For example, for our coffee program we work with an upscale coffee provider, not one of the few core coffee suppliers the majority of the industry does business with. We had to do a lot of soul-searching: Is the c-store industry ready for this? The coffee costs more to buy, and we don't charge more for it. But, we brought in a product that, in our mind, is much, much better than any in the convenience store business today. We think that is paying off well. It's the first time in my career I made a coffee change and had absolutely no complaints – and the cups-per-day sold is continuing to rise.

    CSNews: How will you maintain your vision?

    Gregory: All of our IT systems have been developed in house. We have state-of-the-art fuel purchasing and pricing systems; we have a state-of-the-art information system providing our team detailed information by category, by store, every day. We have an intense focus on expenses – we check every expense every day, line by line. Put it all together and we have systems and a management team that are completely jelled. We thrive on teamwork and have a lot of fun doing what we are doing.

    All of the store managers have our phone numbers and can e-mail us. We are totally accessible 24/7. We meet with store managers and district managers and their supporting staff quarterly. We run all of our marketing programs through them. Everyone has ownership – they get to see their P&Ls and their bonus programs are based on performance. Some of these folks in the past were simply told what to do and when to do it.

    Pierce: We listen to what our store employees have to say. For example, on Valentine's Day, a foodservice manager came up to me and said, "I may have done something wrong, but I took one of our muffins and made it heart-shaped and put some cream in the middle and wrote a Valentine's Day message on it and am selling them."

    Not only did I commend her for doing that, but I called the head of foodservice, the district manager and division manager and told them that this is exactly the kind of culture we want to promote here. Yes, we have parameters like everybody, based on contracts and ingredients, but that didn't change the taste profile of the product we wanted; it was a new way to market it.

    CSNews: How do you pull off leveraging the chain's size, but still marketing locally?

    Pierce: Our size gives us the ability to do things like private-label products that smaller competitors can't compete with. We have been aggressively rolling out private-label water, soft drinks, candy, motor oil – a list of products that gives us an opportunity to do things our competitors can't. Plus, our market penetration allows us some leverage with our supplier community when getting messages out to the public.

    It's one thing to be a large company and act like that, but it's also very common for us, almost daily, to take one store and change the price of cigarettes and have a single-store pricing zone. We are willing to take a more difficult road and say, "This store has to compete with these three stores across the street," and do things in that store we wouldn't in all the others.

    CSNews: Has it been a challenge to find store employees to execute your vision?

    Gregory: Early on that was a problem. We set our standards pretty high. In the existing stores, everything was packaged, and we had very little foodservice. Most of the employees were retail-oriented. With the new prototype stores, the employees are more foodservice-oriented. We're bringing in high-caliber management from quick-service and other restaurant chains.

    CSNews: How do you measure your success now?

    Colling: We budget every aspect of the business. We set margin, profit, sales, gas-gallon goals and expense goals, like everyone else. The other thing we really focus on is same-store sales growth. That is how we judge ourselves on our acquisitions as well. Every acquisition we've made has seen increases in same-store merchandise sales the year after we made the aquisition.

    CSNews: As the MAPCO Mart and Grill Marx concepts take off, would you considering franchising them?

    Colling: Not at this point because we like to keep total control over the concept and the quality, but things change quickly in the industry and we have learned never to say, "never."

    Pierce: I don't think you ever say "never" to anything. Change is a key to our culture and our success.

    We have to continually challenge what we do and determine if it is good for the future. As soon as you shut the door to any idea, you limit yourself. We challenge ourselves with, "Is there something new we should be doing – something no one else has ever done?"

    Quick Take: Delek US Holdings

    Prior to the Favorite Market stores acquisition (still pending), Delek had 394 company-operated c-stores in Alabama, Arkansas, Georgia, Kentucky, Louisiana, Mississippi, Tennessee and Virginia. Approximately 90 percent of those stores are located in Alabama, Tennessee and Virginia.

    The stores sell gasoline under the MAPCO flag, as well as the BP, Exxon, Shell, Conoco and Chevron brands.

    In April 2005, the company acquired a petroleum refinery with a capacity of 60,000 barrels a day, a product loading facility and crude oil pipeline assets in and around Tyler, Texas, from subsidiaries of Crown Central Petroleum. Last summer, it acquired refining equipment, pipelines, storage tanks and terminals to enhance it's marketing and supply operations.

    The company is listed on the New York Stock Exchange under the symbol DK; its initial public offering was in May 2006.

    As They See It

    Two industry watchers give their take on Delek US Holdings

    Adam Sindler, analyst, Morgan – Keegan Co.
    Delek US's growth has been both aggressive and well calculated. The company has established a track record of identifying under-invested-in assets and applying a stronger core of management principles, along with capital infusion, to maximize the profitability of the assets. Almost every acquisition, including the refinery, has had these characteristics.

    I would say as an operator, Delek is right up there with the other top chains, except for possibly foodservice, as the acquired businesses were weak in that area. This past weakness is also a source of future opportunity, however, as management is working diligently on getting its foodservice offering rolled-out to a larger portion of the store base. With a high average transaction value, and solid margins, foodservice should help the company grow both its top and bottom lines.

    The company benefits from two strategic advantages: its large store clusters in core markets and its refinery division. The clusters help maintain orderly gas pricing within those markets. The refinery operations should also start to benefit the c-store business in the near future. While the two segments are not currently physically connected, in that the refinery does not directly supply the stores with gas, management is hoping to affect such a strategy longer term. More near term, management believes it could benefit from product swap agreements with other refiners, thereby indirectly supplying its stores and lowering its cost of goods.

    (Editor's note: Morgan – Keegan Co. has a non-direct investment banking affiliate relationship with Delek US and has received investment banking revenues from Delek US in the last year.)

    Mark Miller, analyst, William Blair &. LLC.
    Historically, Delek US has paid roughly fives times one-year-forward EBITDA, including synergies, for its retails assets. We estimate the Favorite Markets transaction also should be on favorable terms and estimate it could add at least 5 cents to earnings per share on an annualized basis.

    We strongly recommend investors purchase the stock.

    Delek US' Leaders
    Uzi Yemin, President, CEO and Director
    Uzi Yemin has served as Delek US president and a director since April 2001 and CEO since June 2004. Yemin's duties include oversight of top executives and overall responsibility for the operation and performance of the company. Prior to Delek US, Yemin served as the CFO of Delek - The Israel Fuel Corp. Ltd. in Israel. Additionally, he spent two years with CLAL Insurance Company Ltd., an insurance company in Israel, and two years in the Insurance Commissioner's Office of the Israel Ministry of Finance.

    Lyn Gregory, Senior Vice President
    Senior Vice President Lynwood Gregory also serves as COO of MAPCO Express Inc., the company' retail fuel and convenience store operation. Prior to this, he served as MAPCO Express' senior vice president, operations.

    He joined MAPCO Petroleum Inc. in 1990, serving as vice president of operations and vice president of marketing for Williams Express Inc., prior to Delek's acquisition of the company's stores. Gregory is a veteran of the retail fuel and convenience store industry, having spent six years with Georgia Southern Oil, two years with Starvin' Marvin'/Globe Oil, and eight years with Crown Central Petroleum, developing their presence in the Southeast.

    PaulPierce, Vice President of Marketing, MAPCO Express Inc.
    Prior to joining MAPCO Express Inc. in September 2004, Paul Pierce was self-employed as a consultant, developing convenience stores for – Oil Inc. From 1997 to December 2003, he held executive-level positions at Golden Gallon Inc., where he managed merchandise sales, vendor negotiations and contracts, retail pricing, advertising, imaging, store layout and design, budgeting and oversaw the operations team oversight. Pierce has worked for Crown Central Petroleum Corp., Kangaroo Inc. and Palmetto Merchandise Inc.

    JohnColling Jr., Vice President and Treasurer
    John Colling Jr. has been with the company since July 2005. Prior to this, he was the treasurer of Nu-kote International Inc., a manufacturer and distributor of ink and toner printer cartridges. Colling also served as vice president and treasurer of Magnetek Inc., a provider of digital power and electronic products. As treasurer of those companies, he was responsible for worldwide treasury activities including, mergers and acquisitions, corporate finance transactions, corporate risk management and financial planning.

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