3, 2, 1 ... Spinoff!
As more downstream MLPs launch, their retail counterparts chart growth courses.
For Alon USA Energy, plans to spin off its wholesale and retail operations had been in the works for years, but it went nowhere. The Dallas-based refiner-marketer initially filed for an Alon Brands IPO back in 2008, only to withdraw it in May 2012.
A few months later, that IPO became a moot point. Last September, the variablerate MLP ALDW was established, based on Alon’s Big Spring, Texas, refinery and its wholesale business, which serves about 3,000 sites. Alon Brands Retail, which operates 300 7-Eleven-branded c-stores in Texas and New Mexico, remained within its parent company.
While an MLP is technically an IPO, its high-dividend yield—especially for variable-rate MLPs—and favorable tax treatment has made it popular among investors.
“We looked at the market, and it just wasn’t conducive to bringing [the Alon Brands IPO] to the market, and it just didn’t make sense,” McKeen explains. “The appetite from investors in the MLP made all the sense. There’s always options going forward, but the best structure, the best choice was MLP. Ultimately, it means faster growth for Alon Brands.” I
In fact, 2012 marked the first time in the past four years that the company had more integrated branded locations at year’s end than at its beginning.
The fuel rebranding of roughly 1,000 locations from FINA to Alon was completed within a single year—and it had to be quick. While achieving consistency throughout the entire network was a motivator for the rebranding, the most important factor was to communicate that the retailer’s transformation was complete.
“We spent two years focused on operational excellence, a year and a half on an aggressive remodel campaign for our retail locations, and outwardly, we were still the same entity we were before,” McKeen says. “[We] discovered our best opportunity was to come out with what was really a true brand, which was Alon. It was indicating to the motoring public and c-store customers that things had changed, things were different.”
“To our distributors, our customers, it was a new way of doing business,” concurs Judge Dobrient, senior vice president of wholesale marketing for Alon Brands, who describes this higher level of professionalism as a “different culture.” “It wasn’t the same company we’ve marketed in the past.”
(The MLP, it should be noted, had no influence on the rebranding, which was “in the works long before the decision to form an MLP,” says McKeen.)
The starting point, says Dobrient, is the Clean Team operational excellence program, now in its third year. A third party performs quarterly assessments of every Alon brand location, evaluating 60 variables such as cleanliness, out of stocks and greetings. Stores are given new score goals to shoot for in each cycle, in the spirit of continuous improvement. For 2013, the program is giving away 13 cars to store managers, customers and even community groups to reward highperforming locations.
“What’s been truly amazing to me is the level of performance in not only our direct but also our wholesaler ops,” says McKeen, who points out that the majority top-performing wholesaler-op Clean Team stores have the highest P&Ls.
Making good on the brand promise worked both ways: Alon decided not to accept about 100 distributor sites that were not able to meet its customer-service demands.
Alon Brands’ remodel campaign will be halfway done by the end of 2013. The retailer also built its first ground-up in eight years, in El Paso, Texas. It aims to build 10 more locations over the next few years. From a wholesale perspective, Alon is introducing new programs for fleet fueling and commercial customers, and one that incorporates RFID technology, testing in El Paso and slated to roll out this year.
“The growth opportunity is better than it ever has been,” says Dobrient. “Under our old brand ... we had an eightstate, confined marketing area. Now, with Alon, we can go wherever we want to go. That’s the beauty of it, and we’re already looking at new markets to expand into.”
A Retail Giant Arises
For San Antonio-based refining titan Valero Energy, MLPs are old hat. Back in 2001, the refiner-marketer formed MLP Shamrock Logistics LP from the pipeline and storage assets of the former Ultramar Diamond Shamrock Corp. Valero Energy later separated from the MLP, which was ultimately renamed NuStar Energy LP, and led by former Valero CEO Bill Greehey.
Now Valero is looking to launch another MLP, this one based on its logistics and transportation business, after successfully spinning off its retail business into CST Brands Inc. in May. While the dividing line between MLP and retail is more pronounced, it continues the spinoff narrative.
For now, CST Brands is “embedded” in its parent company, explains president and CEO Kim Bowers. Valero distributed 80% of CST Brands shares to Valero shareholders, who received one share of CST Brands common stock for every nine shares of Valero common stock. Valero retained 20% of CST Brands’ outstanding shares, but only for up to 18 months, “after which, we will be totally separate companies,” Bowers told CSP. “The only connection will be our supplier agreement going forward.” Valero supplies more than 7,300 retail and branded wholesale sites in the United States and the Caribbean with Valero, Diamond Shamrock, Shamrock and Beacon branded fuel.
It would also make CST Brands the second-largest publicly traded U.S. c-store chain after Alimentation Couche-Tard, with 1,900 sites in the United States and Canada, revenues of $13.1 billion and nearly 12,000 employees. This includes more than 1,000 stores in nine Southern and Southwestern states, with more than half of CST’s Corner Stores in Texas, one of the fastestgrowing states in the nation.
“We are a very large player from the first day we stepped out,” Bowers says.
The spinoff has felt positively liberating for the retail operations, not only from a financial perspective but also a cultural one. “We were 10% of Valero’s overall profitability,” Bowers says. “Our cash got swept away every day by our parent company. And [now] we get to keep that cash, and reinvest in our business.”
Case in point: The company in 2013 plans to add 15 supersize U.S. and eight Canada locations, ranging from 4,500 to 5,500 square feet, with larger bathrooms; 40% of the square footage is devoted to foodservice. As of press time, CST had 36 of these large-format sites, built on 2-acre lots to provide ample parking and multiple MPDs to avoid queuing issues.
“Our bread-and-butter customer is still construction and oil-field workers, folks going into offices,” says Bowers. “But new stores cater to folks like me, who need to run and only have 5 minutes before they have to pick up kids from school. In our store you can do that, because there’s ample space.”
Value will be another CST hallmark, delivered by its Fresh Choices privatelabel program, which includes 185 items. The program will soon expand to Canada.
And non-organic growth may be on the horizon, too. As Bowers, a former M&A attorney for Valero Energy, says, “I have a team that is not only strong in operations but also savvy on acquisitions, so as the market starts to consolidate, we’re in a good position to operate.”
A self-described “people person” with a warm, gregarious personality, Bowers is also quickly making her mark on CST culture. Gone is the suits-and-oil-company formality of Valero; in are jeans and shorts, and men now can grow facial hair. (The retail arm of Valero, in deference to its refinery colleagues, had followed a safety policy prohibiting facial hair.)
“We’re a company of everyday people, and our customers are everyday people, and we’re trying to level that playing field,” says Bowers. “Just because I have a bigger office doesn’t mean I’m fancier or more important than anyone else.”
And now, with the spinoff completed, everyone is going to get a lot closer.
“My goal is to make sure every store manager feels like part of the family, part of the team, and has the opportunity to be heard,” says Bowers. “If they have suggestions for modifications or ways to do things differently, I want to make sure we have those forums. Great ideas come from all corners in companies, and we want to be able to hear them.
“Retailing is a people business,” she says. “Having this as our 100% focus every day will let us be more adaptive, flexible and more able to think outside of the box. We’ve got some great ideas that have been on the back burner for a while, and now the dreaming is beginning.”
What Is an MLP?
An MLP is a limited partnership publicly traded on a securities exchange such as NYSE, NASDAQ and AmEx. MLP ownership interests are known as units as opposed to share of corporate stock; cash paid out to unit holders is known as distributions rather than dividends. In its purest form, an MLP combines the favorable tax treatment with the liquidity of publicly traded securities. By IRS definition, an MLP must derive at least 90% of its revenue from natural resources, so most are formed by energy-industry players, with midstream operators currently making up the majority. This share is changing as downstream energy players have found ways to qualify for an MLP. While MLPs can own c-store real estate and collect rent, they cannot qualify c-store income for the favorable MLP tax treatment.