CST Brands: About to Be Sold?

SAN ANTONIO -- As speculation swirls around the likely sale of convenience-store retailer CST Brands, analysts, industry insiders and investors of the publicly traded company agree that the company’s upcoming second-quarter earnings call is critical.

“It’s been more than four months since CST began looking at strategic alternatives. Some investors are growing impatient,” said one institutional investor, who, like others interviewed for this story, spoke on condition of anonymity to comment openly about CST and its future prospects.

San Antonio-based CST Brands will release its second-quarter results on Aug. 5. It comes five months after the retailer formally launched a full exploration of strategic alternatives in response to pressure from activist shareholders who late last year accused CST leadership of failing to deliver shareholder value.

CST responded by forming a special committee of independent directors to oversee the process, forging agreements with activist shareholders JCP Management and Engine Capital LP to changes on the company’s Board of Directors.

Since then, CST fetched a very lucrative return from 7-Eleven Inc. and its subsidiary SEI Fuel Services, selling 79 locations—all but three sites in California—for $408 million in May.

From two months of interviews with sources tracking CST’s situation, CSP Daily News has learned the following:

At this stage, there is less than a 5% probability that CST Brands will remain an independent operator. According to multiple sources, the company will be sold before the end of year. Two sources confirmed that if the company is not sold by year’s end, CEO Kim Lubel (pictured above) could be replaced with an interim leader.

When CST Brands announced plans to explore strategic alternatives, its stock was hovering between the low and mid-$30s per share. Recently, the stock has climbed to $41 per share.

Several sources say that shareholders are looking for at least $50 per share as a reasonable payout. “It would definitely have to be north of $50,” one shareholder told CSP Daily News. “We’re looking for at least $52 to $54. Anything less than $50 would be disappointing.”

In determining a $50-plus figure per share, multiple sources based the total on an average of $3 million to $3.5 million per store on the Texas assets and approximately $1.5 million per store on remaining assets.

We don’t know for sure, but we’re getting close, possibly very close. Here are some key factors to consider:

• Major chains such as Alimentation Couche-Tard, 7-Eleven and Marathon Petroleum are in a better position to fund the high price tag. This is because they are best leveraged to maximize what is between $100 million and $120 million in G&A (general and administration) expense. “Let me put it this way,” one observer said. “What makes this deal more difficult for a private-equity firm is they don’t have a retail infrastructure in place. They don’t have an HR department; they don’t have an accounting team; they don’t have the pieces in place to save on what is a very high G&A.” Another source, who favors Couche-Tard or 7-Eleven as the likeliest buyers, adds, “There’s a lot of fat to cut. I think we’re looking at an 11x to 12x multiple before synergies.”
• If you want a real dark horse, some industry observers say keep an eye out for the company that originally divested CST Brands—Valero Energy. “I don’t see it,” one investor said, “but if they could get it for the right price, it would ensure them a large retail network to carry their [Valero fuel] brand.”
• Private Equity: Wait! Didn’t we just say groups, including the widely conjectured Blackstone Group LP and Apollo Global Management, would be poorly positioned because they would have less to cut due to their lack of industry infrastructure? Yes, you read correctly. However, they do possess a certain gift, and that’s the ability to raise lots of capital fast and cheap. The other upshot is these investors tend to put greater value on quality real estate.

At least two parties interviewed—each with a different perspective of CST—raised the idea of naming former Susser Holdings/Stripes Convenience Stores head Sam Susser (pictured above) as CEO of CST Brands. One suggested bringing in Susser, who sold his company in 2014 to Energy Transfer Partners, even if CST isn’t sold, while the other identified Susser as an alluring figure should an investment group acquire CST. The speculation is rooted largely in two key factors:

• Susser, CSP’s 2014 Retail Leader of the Year, hails from Texas and won plaudits for his leadership of Susser/Stripes.
• Additionally, one of the new directors added to the CST board in March was former Susser executive Rocky Dewbre.

CST Brands currently operates a network of about 2,000 convenience stores. How would those sites be handled by a new owner?

While the heart of its portfolio resides in Texas, the company’s remaining assets are far-flung through its control of 265 stores in Canada, more than 70 from its 2014 acquisition of the Nice N Easy chain in upstate New York, and operations of CrossAmerica Partners LP, a master limited partnership (MLP) with headquarters in Allentown, Pa., that is engaged in wholesale distribution of motor fuels. In addition, CST Brands also owns the 170-store Flash Foods Inc. based in Waycross, Ga.

Two sources told CSP Daily News that while CST is intent to sell the entire network to a single buyer, if it cannot obtain a satisfactory price, it could divest the Canadian and New York assets and the Flash Foods portfolio in separate transactions.

“That would surprise me,” said a third source. “But it could enable them to leverage their Texas assets and achieve maximum value for shareholders.”

As for CrossAmerica Partners, several experts interviewed said the MLP component would have little interest for strict retailers such as Couche-Tard or 7-Eleven but could be an effective vehicle for an oil company like Marathon.

As it prepares for the second-quarter earnings call, CST is coming off a strong first quarter, where it reported a gross profit of $300 million, a 12% increase over the same period 2015. And as July rolls into August, the company’s stock is selling solidly at $40-plus per share, with another solid earnings performance expected.

Stay tuned.