SAN ANTONIO – Let's be clear. Last week's deal between CST Brands Inc. and Lehigh Gas Partners (LGP) is big.
Don't be fooled by the $85-million price tag. When compared to the multi-billion-dollar deals of Energy Transfer Partners and Susser Holdings, or Speedway and Hess, this deal at first glance seems like a blip, dismissed by a fly swatter.
But in the world of master limited partnerships (MLPs), what you see isn't always what you get.
Despite the flowery language of partnership and team, CST Brands--the retail network spun off by Valero last year--is the acquirer. This is their move by a team not unfamiliar with dramatic growth as part of Valero's surge in the late 1990s and early 2000s. This deal is also a real win for entrepreneurial Lehigh CEO Joe Topper. He was responsible for pursuing an MLP strategy for Lehigh and has parlayed it into a string of modest-size acquisitions that rapidly has grown the Bethlehem, Pa., fuel wholesaler.
But Lehigh faced a problem that Topper and his leadership team acknowledged in early May on the heels of ETP's acquisition of Sussers. It frankly wasn't big enough to compete against the biggest MLPs.
"I would tell you that they paid a formidable price, and the larger acquisitions get at that pricing, that will be a drag on us doing larger deals," LGP president Dave Hrinak said during the company's first-quarter 2014 earnings call, alluding to the ETP-Susser purchase.
Hrinak and Topper know the full muscle of ETP well. Lehigh bid on both the Mid-Atlantic Convenience Stores (MACS) last year and Tigermarket earlier this year, only to see ETP win on both.
Seeing ETP stretch the multiples on those acquisitions, Topper said, "The higher end of it was driven by ETP in the deals that we did not get."
"I think some buyers are trying to take advantage of interest rates at the level that they're at to lock in some financing at this rate and buyers would be more aggressive there and are willing to sell for," he said during the earnings call. "So, I think it's a combination--there were some aggressive buyers out there, there are some interest rate risks that people were trying to lock in, and I think sellers were asking for more."
Topper's insights lead to these conclusions:
Continued on next page.
- Big Game. This deal places the newly enlarged CST on a comparable footing with ETP. We very well could see an M&A surge akin to what the industry absorbed in the late 1990s when The Pantry, Swifty Serve, Clark and Convenience USA went on a binge. The important difference is those companies often played with money they didn't have and leveraged a reckless arbitraging environment that was taking place then in the U.S. economy.
- MLPs. Traditional acquisition-minded chains like 7-Eleven and Alimentation Couche-Tard face a dilemma. They are committed convenience retailers with tremendous portfolios. But today's market structure dramatically favors MLPs. When it comes to paying higher multiples, traditional convenience chains cannot compete with MLPs--it's akin to squaring a welterweight against a heavyweight.
- Forecourt Flexibility. CST is currently in the second year of a 15-year supply agreement with Valero. Under the terms, CST is committed to Valero for 10 years generally for their existing stores, followed by a 20% optional yearly decline in supply until the commitment expires in 2028. When it comes to acquisitions or new construction, however, CST is a free agent, able to tap any fuel brand. With Lehigh, an experienced wholesaler with such banners as Exxon, Mobil and BP, CST suddenly obtains significant leverage to expand into others parts of the country and tap the most popular brands in those markets.
"CST, at the end of the day, will be acquiring the general partner, the controlling interest in the MLP," CST Treasurer Jeremy Bergeron told CSP Daily News in an exclusive interview. "But I want to be clear. As Kim [Bowers] has said, we view this as a partnership with Lehigh, tapping the strengths of both companies."
"Lehigh has a lot of successful experience in wholesale fuel marketing and CST has a track record of great retail experience. With this deal, we combine those two aspects and get a favorable capital structure that gives us a lot of flexibility," Bergeron added. "It allows us to be selective on deals. It can be a pure wholesale play, it can be a pure retail play or it can be both. We can really pursue any kind of deal in just about any location."
Why Only $85 Million
When you look at the respective portfolios of CST Brands and Lehigh Gas Partners, you immediately see two sizeable companies with distinctive strengths and operational bases. CST operates 1,900 sites in nine southwestern states and six Canadian provinces. LGP distributes to roughly 1,100 stores primarily in the eastern seaboard.
So, if ETP paid $1.8 billion to acquire Susser, why is this deal not even one-half of 1% of ETP's?
The answer is found in the framework of the acquisition. By acquiring only the GP and potentially very lucrative Incentive Distribution Rights (IDRs), CST did not pay for any equity stake in LGP. There will be no change in LGP's unit-holder base as a result of the acquisition. What CST is obtaining however is control and immediate access to a favorable capital structure for future growth while also finding a new home for its extremely valuable assets, such as its new-to-industry (NTI) properties and very large retail fuel distribution.
As these assets are sold to the MLP, CST will receive cash and a growing interest in LGP's limited partner units. And as LGP grows, so will CST's IDR and unit distribution payments.
Obtaining this capital structure, while also acquiring a company with the track record of LGP, makes this acquisition not only big, but positions CST to become a national player of the likes of Circle K and 7-Eleven, and at the very least a super-regional powerhouse.
Members help make our journalism possible. Become a CSP member today and unlock exclusive benefits, including unlimited access to all of our content. Sign up here.