Jim Bosworth was around for the high-profile M&A rollup at The Pantry, which began in earnest in 1997. Working closely with Pete Sodini, one of the industry’s most revered dealmakers of the late 1990s and 2000s, Bosworth helped engineer the drive that at one point made it the darling of Wall Street. After Sodini retired, difficulties followed that led to Couche-Tard’s eventual intervention, but the memories of those days have new relevance in the present.
“At my time with The Pantry, it was a roller coaster, with the [valuation] multiple increases coming faster and the downs slower,” says Bosworth, now vice president of real estate and strategic growth for Cary Oil, Cary, N.C. “But nowhere near as high as the last three years.”
Surely, he thought, some of these recent multiples—reportedly in the high single- to double-digit range—had to be typos.
Beneficiaries of some of the potential windfall were undoubtedly chains such as Tedeschi Food Shops, Rockland, Mass., and Victory Petroleum, Miami, both snapped up by Dallas-based 7-Eleven; and Flash Foods, Waycross, Ga., taken in a deal with San Antonio-based CST Brands that is set to finalize in the coming weeks. All are independently created, standout brands—with Victory having a solid presence in the hot Miami market, Tedeschi being known for its deli offer, and Flash Foods leading in technology.
“It’s a shame that innovative players get taken out, but it’s a natural phenomenon,” says Jeff Kramer, managing director of NRC Realty & Capital Advisors, Chicago. “Some innovative players are finding that the cost of properties has gone up so much that they can’t find them as readily or find the returns as easily as they have in the past.”
Several factors are pressuring valuations upward, Kramer says, including solid earnings from higher fuel margins; strong store profits from smart operators, particularly those focused on foodservice; and falling gas prices that gave more disposable income to consumers. The backdrop of a “not so strong but good enough” economy and low interest rates combined to provide cash flow and additional financing for deals that may have once needed banks.
That’s not to say multiples will stay high forever. Kramer and others see challenges, with low gas prices pressuring MLP stocks; rising wages, operational costs and regulation; and the need for companies to absorb acquisitions and create value all forcing staggering multiples into an eventual cool-down.
Add the fact that top performers want new builds vs. older assets, and the Top 101 may also cool down in 2016.
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