Insider's View: A Q1 M&A and Capital Markets Review

More players chasing fewer assets

Published in CSP Daily News

By  Dennis L. Ruben, Executive Managing Director, NRC Realty & Capital Advisors LLC

Dennis Ruben

SCOTTSDALE, Ariz. -- Last year was truly a banner year for merger and acquisition activity in the convenience store industry. We witnessed the culmination of major oil company retail asset divestitures, as well as a very aggressive acquisition program by 7-Eleven Inc.

There was also a wave of activity on the master limited partnership (MLP) front, with several major industry players either filing registration statements for initial public offerings (IPOs) or exploring this alternative. Meanwhile, other major industry participants were also growing aggressively through acquisitions or new-store development.

Based on the transactions that were reported in the first quarter of 2013, it appears that the trends and developments we saw in 2012 will continue well into this year, with some changes.

Obviously, since most of the major oil companies have divested their retail asset portfolios, it will become that much more difficult for buyers to find large portfolios of stores to acquire. Similarly, with the proliferation of MLPs and other large companies with access to significant amounts of capital, either through the public capital markets, the private capital markets, or through the ability to obtain debt financing on reasonable terms, there will clearly be more players chasing fewer assets.

Presumably, that will have the effect of driving up purchase price multiples. It will be interesting to track these trends as the year progresses.

Here's a look at where the industry stood as the first quarter of 2013 ended:

MLP Momentum Continues

Coming on the heels of a number of IPOs in 2012 involving MLPs, several other industry players either commenced the IPO filing process or began an analysis of the merits of using an MLP structure. Western Refining Inc., El Paso, Texas, announced that it authorized its management to explore the formation of an MLP and the filing of a registration statement for an IPO in connection therewith. Western's retail group operates 200 c-stores and gas stations in the Southwest.

Other major industry players have openly commented on the potential advantages of MLPs or real-estate investment trusts (REITs), including Casey's General Stores Inc., Ankeny, Iowa. Last month, Phillips 66 Partners LP, a wholly owned subsidiary of Phillips 66, Houston, filed a registration statement with the SEC for an MLP spinoff involving its fee-based crude oil, refined petroleum product, natural gas liquids pipelines and terminals, and other transportation and midstream assets.

Hess Corp.

Early this year, an "activist investor" in New York-based Hess Corp. urged the Hess board directors to consider ways to maximize shareholder value, including the possibility of divesting certain assets or forming an MLP or REIT. Hess is one of the largest independent gasoline and convenience retailers on the East Coast and has more than 1,350 locations in 18 states, including 290 Hess-branded locations in Florida.

The Hess investor suggested that by divesting or monetizing downstream retail assets, the company could release up to $5.5 billion of capital that could be returned to shareholders, which would create an additional $11 per share of value for shareholders--a 20% impact. Perhaps partially in response to investor pressure, Hess recently announced that it will pursue the sale of its terminal network in the United States and will complete its exit from the refining business. Hess also announced that it was exiting the downstream business, including retail, energy marketing and energy trading.

7-Eleven Inc.

After a breathtaking series of acquisitions in 2012, Dallas-based 7-Eleven showed no signs of slowing its pace of adding new stores to its system. The company predicted that it expected the number of 7-Eleven stores worldwide to pass the 50,000 mark by the end of the first quarter. In 2012, 7-Eleven added nearly 1,000 new stores in the United States and Canada alone. 7-Eleven announced plans to significantly expand its presence in the New York City area and plans to open at least 30 new stores a year. The company also announced that after two decades, it would again have a presence in the Detroit city limits. By the end of the year, the company plans to have three stores in the downtown business district.

7-Eleven also announced last month that it was leasing 19 stores in the Cleveland area from Lehigh Gas Partners LP, Allentown, Pa. This transaction will add to the other locations in the Cleveland market that it acquired last year from both EZ Energy Ltd. and Handee Marts Inc. The company also announced last month that it has opened 12 stores in northeast Florida after a 20-year hiatus. 7-Eleven has indicated that it plans to have a total of 80 sites in the area by 2015.

Alimentation Couche-Tard/Circle K

Laval, Quebec-based Alimentation Couche-Tard Inc., through its wholly owned indirect subsidiary Mac's Convenience Stores LLC, completed the acquisition of the assets of Dickerson Petroleum Inc., which operates the Gas Mart chain based in Belleville, Ill. The acquisition consisted of 29 company-operated retail locations and 29 wholesale assets.

Other Major Industry Players

  • Susser Holdings Corp., Corpus Christi, Texas, opened a record 10 new Stripes c-stores during fourth-quarter 2012 and expects to build 29 to 35 new stores in 2013.
  • Cary, N.C.-based The Pantry Inc. opened its first new store in four years in Charlotte, N.C. Recently, it has focused on upgrading its portfolio of Kangaroo Express-branded stores to a more contemporary look and feel and began converting dozens of stores last year, with 70 more remodels planned in 2013. The company is scheduled to build five more ground-up stores this year.
  • Wawa Inc., Wawa, Pa., continued its aggressive expansion program, particularly in Florida. Last year, Wawa entered the Florida market with the opening of six stores in the greater Orlando area. In the first quarter of this year, Wawa opened additional new stores in the Orlando market and also opened its first stores in the Tampa Bay area. The company has indicated that in 2013, it intends to open 10 stores in Tampa and 15 stores in Orlando. Wawa has announced that in both markets, it will open 25 stores in 2014 and 25 stores in 2015, and projects that it will open a total of 100 stores in these two markets in the next five years.
  • After a banner year of expansion in 2012 consisting of 43 new locations, West Des Moines, Iowa-based Kum & Go LC appears to be continuing its organic growth strategy. It has already opened new stores in Iowa, Colorado and Arkansas.
  • Casey's General Stores Inc. is also continuing to expand through new-store development. It has expanded in the Wichita, Kansas, area and is also adding new locations in northwestern Arkansas.
  • Kwik Trip Inc., La Crosse, Wis., announced that it would add approximately 15 new stores in 2013.
  • Mid-Atlantic Convenience Stores Inc. (MACS), Richmond, Va., is in the process of completing the conversion of its 71 company-operated stores to the Circle K brand.

Other Notable M&A Transactions

  • Thorntons Inc., Louisville, Ky., has continued its expansion efforts by adding a new store in the Cincinnati area, making it the 15th store in that market. The company also opened its second store in Florida and announced that it hopes to have six stores open in that market by the end of this year or early next year.
  • Artemis Acquisition Corp., Bluffton, S.C., completed the acquisition of Travel Center Partners Inc., which operates six retail c-stores and truckstops in South Carolina and Georgia.
  • Kugler Co., McCook, Neb., announced that it has agreed to sell its five K-Stores convenience stores and gas stations in Nebraska to Colorado Retail Ventures Services LLC.
  • Coen Oil Co., Washington, Pa., purchased six Kwik King stores in Pennsylvania from Kwik King Corp., seven stores in Pennsylvania and Maryland from Ashbridge Oil Co. Inc. and two other stores in Pennsylvania. As a result of these acquisitions, Coen now owns and operates 31 stores in four states.
  • Jackson Oil Co., Albany, Ore., completed the acquisition of the branded dealer business of Pettit Oil Co. in the Pacific Northwest, consisting of 104 locations.

Oil Company Initiatives

  • Valero Energy Corp., San Antonio, is in the process of spinning off its retail business in a separate entity to shareholders and expects the transaction to be completed in the second quarter of this year. The new entity, CST Brands, will be the second-largest publicly traded independent retailer of fuel and convenience merchandise in North America, with nearly 1,900 sites located throughout the southwestern United States and eastern Canada.
  • The speculation over the future of Sunoco's 4,988 station retail network after the company's acquisition by Energy Transfer Partners LP, Dallas, seems to be settled, at least for the time being. In a recent earnings conference call, ETP senior management stated that the company has "no plans at all" to sell the Sunoco retail network.

Divestiture of Nonstrategic Assets

  • Mutual Oil Co. Inc., Brockton, Mass., sold 19 gas station and convenience store wholesale assets to multiple buyers so that it could focus exclusively on its wholesale business. The buyers included a subsidiary of Global Partners LP and various regional jobbers and individual store operators.
  • Tesoro Corp., San Antonio, announced that it was ceasing refining operations at its Hawaii refinery and would likely be disposing of its 31 gas stations in the state.
  • Tri Star Energy LP, Nashville, Tenn., is selling 22 convenience stores and retail gasoline stations in Tennessee through NRC Realty & Capital Advisors LLC, Chicago.

Getty Realty

Getty Realty Corp., Jericho, N.Y., had a transformational year in 2012 and is continuing its progress in first-quarter 2013. During 2012, Getty Realty entered into 10 new long-term triple-net leases on more than 440 locations with eight tenants, including three NYSE companies.

The company also sold 54 properties in 2012 and an additional 36 properties thus far in 2013, primarily through its engagement of NRC Realty & Capital Advisors. The company is in the process of addressing the repositioning of the final 170 properties in its portfolio, which are operating with tanks in the ground. Getty Realty has also retained NRC to assist in the divestiture of six closed petroleum terminals in New York and New Jersey.

Bankruptcies

Jump Oil Co. Inc., a petroleum marketing and convenience store company based in Jefferson City, Mo., filed a Chapter 11 bankruptcy petition last month. The debtor is offering to sell its chain of 47 gas stations and convenience stores and one other retail location, the related dealer leases and fuel supply agreements and five unimproved parcels of real estate through the bankruptcy proceeding.

Conclusion

Although the first quarter of each year tends to be slow in terms of merger and acquisition activity, such does not seem to be the case in the first quarter of 2013. Major industry participants appear to be continuing their growth initiatives and are looking to grow organically through new store development in existing and new markets, as well as through strategic acquisitions of portfolios and companies.

Industry consolidation appears to continue to be the theme of the day, with both 7-Eleven and Circle K looking to expand their footprint nationally. In addition, companies like Wawa, Susser Holdings and Kum & Go are continuing to build new stores at a rapid pace.

Again, there appear to be more players chasing fewer assets. It will be interesting to see how the year progresses in terms of acquisition opportunities that may not be on the radar screen right now. Stay tuned.

[Editor's Note: Dennis L. Ruben, executive managing director of NRC Realty & Capital Advisors LLC, will contribute an annual and quarterly column to CSP, analyzing mergers and acquisitions and key economic trends in the convenience channel. He can be reached at dennis.ruben@nrc.com. He will also headline the Capital Markets Symposium at the 2013 Outlook Leadership Conference, Nov. 9-12 in Scottsdale, Ariz.]

Keywords: 
M&A
By Dennis L. Ruben, Executive Managing Director, NRC Realty & Capital Advisors LLC
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