Behind CST Brands’ Deal with Shareholders

How did retailer squelch potential board of directors battle so quickly?

By 
Mitch Morrison, Vice President & Retail Executive Platform Director, Winsight

reach compromise

SAN ANTONIO -- It’s over, and yet it had just begun. 

Unlike The Pantry Inc. two years ago, the proxy battle at CST Brands was short-lived and resolved not with a corporate coup, but a compromise.

Shortly after markets closed on Thursday, March 3, CST Brands management and two activist shareholder groups—JCP Investment Management and Engine Capital L.P.—reached an agreement that will likely fast-track the sale of the San Antonio-based retailer of more than 1,900 convenience stores.

What follows is based on interviews with multiple CST Brands shareholders and industry experts who have maintained a close watch of the company.

Driving the Engine

While prefaced in December by some tough talk about CST Brands needing to improve its strategy, the first real shots fired in this battle came Monday, Feb. 29. Engine Capital issued a statement saying it intended to nominate an alternative slate to the CST board of directors, a lineup rich in retailer experience featuring three former convenience-store executives and an Engine Capital leader.

  • Rocky Dewbre, former executive vice president of channel operations for Sunoco LP and president and CEO of Susser Petroleum Partners LP
  • Bryan Smith Jr., previously executive vice president and chief administrative officer of 7-Eleven Inc.
  • Daniel Pastor, previously CEO of MACS Convenience LLC, which was acquired in 2013 by Sunoco
  • Brad Favreau, a partner with Engine Capital Management

Engine Capital’s intentions were clear: The best path to maximizing shareholder value would be entertaining offers from a field of large-scale retailers such as Alimentation Couche-Tard and Speedway, as well as private-equity firms. In other words, CST Brands’ future as an independent company would soon come to an end.

There was a problem, however. At that moment Engine Capital, a minority stakeholder, was alone. None of the major institutional shareholders had clearly stated their position on whether they would support Engine’s slate. Notably, this included Iridian Asset Management, which controls a nearly 9% stake in CST Brands, and other major investors, including Vanguard Group, Advisory Research, Champlain Investment Partners and Pennant Capital Management.

What was known, according to several sources, is that these key stakeholders were in agreement that CST’s stock was underperforming and that serious questions continued to circulate about whether CST’s latest strategic direction could generate public confidence. Simply put, despite the best of intentions, CST seemed stuck.

While Engine Capital pursued its course, a second investment group headed in another direction. JCP Investment Management LLC also went public in December with concerns about CST Brands. And like Engine, it raised a litany of issues that spoke to CST’s underperformance at both the retail and corporate levels.

This is the same investor that, two years ago, partnered with Lone Star Value Management to form Concerned Pantry Shareholders and helped stage a corporate coup at The Pantry, ousting its board chairman and two other board members and ultimately spearheading the chain’s sale to Couche-Tard in late 2014.

But unlike JCP’s experience with Lone Star at The Pantry, in the case of CST Brands, JCP and Engine Capital were not in alignment.

According to multiple sources, Engine Capital went solo in assembling its slate of board candidates and did not solicit input from JCP or other major stakeholders. Once the slate was released, JCP neither publicly endorsed nor opposed the dissident slate.

Sources told CSP Daily News, however, that the only nominee JCP favored outright from the Engine Capital list was Dewbre, in large part because of his work with Susser, a publicly traded company led by Sam Susser before its sale to Energy Transfer Partners (ETP) in 2014 for $1.8 billion.

In addition, the same sources shared that JCP liked Thomas “Tad” Dickson, who was a board director at The Pantry and became its chairman after JCP and Lone Star’s successful proxy battle against Pantry management. Unlike Engine Capital, however, JCP as of last week had not assembled a slate for the four CST Brands’ board positions that would open up this spring.

Brokering a Deal

While JCP Investment Management and Engine Capital pursued their respective courses, CST CEO and president Kim Lubel and key board members were holding internal discussions to determine whether to nominate the four incumbent directors whose terms were expiring—and thereby go to battle against the activist shareholders—or seek a potential compromise.

While details have not been spelled out, sources say that CST Brands and JCP were in communication last week with hopes of reaching an agreement before the formal nominations were to open March 5. (Officially, Monday, March 7, would be the first day parties could formally submit nominations to serve on the CST Brands board of directors.)

From there, CST contacted Engine Capital with a proposed compromise. In it, both Engine and JCP would receive one director apiece—Dewbre and Dickson—while CST Brands would nominate three incumbents—Ruben Escobedo, Alan Schoenbaum and Denise Incandela—to new three-year terms, while asking William Moll, who has served on CST’s nominating and governance committee, to step down upon completion of his term.

More important, however, is that CST would agree to explore strategic alternatives, including a potential sale of the company to a third party. CST also agreed to retain the services of BofAMerrill Lynch and J.P. Morgan Chase as co-advisers.

“It’s a fantastic outcome to all shareholders,” said one stakeholder, who, like others, agreed to speak on condition of anonymity.

“We believe there is still a lot of untapped value at CST,” another shareholder said. “This is not a perfect compromise, but it’s a very good one.”

San Antonio-based CST Brands is the fifth-largest conveniece-store retailer in North America will more than 1,900 sites in the United States and Canada.

Mitch Morrison Winsight CSP By Mitch Morrison, Vice President & Retail Executive Platform Director, Winsight
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