A New Nationwide Player
With LGP acquisition, CST Brands doubles store count, markets, eyes next opportunity
SAN ANTONIO & ALLENTOWN, Pa. -- Two young public companies are banding together to fuel even greater growth with the announcement on Wednesday that CST Brands Inc. is acquiring the general partner of Lehigh Gas Partners (LGP), along with its incentive distribution rights (IDR). The most immediate effect: a greatly expanded store count, fuel brand representation and footprint stretching to both coasts.
In an investor call on Thursday, CST Brands chairwoman and CEO Kim Bowers and LGP president and CEO Joe Topper gave some color on why the transaction was such an attractive proposition for both parties, believing it will fuel even more acquisition opportunities against the backdrop of a consolidating industry. CST is acquiring LGP for $500,000 in cash, and the incentive distribution rights (IDR) for $16.5 million in cash with the remainder in CST common shares, for a combined value of $85 million.
The acquisition, which they expect will close in the fourth quarter, will transform CST Brands from a regional player in the Southwest to a national heavyweight:
- CST's current footprint would expand from 1,900 sites in nine southwestern states and six Canadian provinces to the East Coast, where LGP distributes fuel to nearly 1,100 sites, owning or leasing more than 625 of them (see map below).
- Annual fuel volume would jump 1 billion to hit 3.9 billion gallons, with 2.9 billion in the United States
- Annual revenues would grow from just shy of $13 billion to hit $16.3 billion.
"We're doubling our sites in the U.S. alone," said Bowers. "It also shows you how complementary our geography is. Really building up the presence on the East Coast will allow us to do new store growth in this direction, look for acquisitions in this area as well as bring the wholesale business out West to marry up with our operations in that direction."
The deal gives CST immediate access to master limited partnership (MLP) capital markets to fuel organic growth, and places it in a better position to grow its core through third-party acquisitions, all the while avoiding the cost and risk associated with forming its own MLP.
The acquisition also extends CST's fuel brand portfolio from four--including its own private brand--to 11, adding on such majors as BP, CITGO, Gulf, Sunoco, Chevron, Exxon and Mobil.
CST will control LGP through its 100% ownership of the general partner. Topper remains as LGP president and CEO and along with other insiders continue to own 44% of limited partner interests in LGP (see chart below).
"With sticking around and helping us grow our two companies, Joe is taking 80% of his purchase price in CST stock," Bowers said. "To say he's all in is an understatement. He is most definitely not selling out, he is buying in."
LGP will operate as a separate, publically traded MLP. While initially there will be no change in ownership of its common units, CST expects to receive ownership of them over time, as partial consideration for the drop-down. CST will manage and operate all c-store operations, while LGP will manage all U.S. wholesale fuel operations and the dealer network.
CST will drop new-to-the-industry (NTI) property to LGP at fair market value; CST will then receive cash and LP units at about a 75/25 split. Equity in CST's wholesale fuel supply business will drop to LGP over the next five more years, for which CST will receive cash and LP units. CST will get income from distributions related to the IDRs and LP units from dropping the NTIs and wholesale fuel equity.
"This a great partnership on many different levels," said Topper. "We get the security of drop-downs from the continuity of dividends and dividend increases, but also see this as a way to increase our wholesale business as well as, using CST as an operator of the stores as we go out and hunt for more acquisitions. They are a great operator and actually I'm more confident in their performance than our performance, and I think we will get better returns from this partnership."