CST Brands Opens Door to Cash Flow, Growth With Acquisition

Retailer takes control of Lehigh Gas Partners in $85 million deal

Angel Abcede, Senior Editor/Tobacco, CSP

Greg Lindenberg, Editor, CSP

CST Lehigh (CSP Daily News/ Convenience Stores)

SAN ANTONIO & ALLENTOWN, Pa. -- In a move that heightens the petroleum and convenience store industry's fervor over the master limited partnership (MLP) structure, c-store retailer CST Brands has arranged to buy Lehigh Gas GP LLC, an aggressively growing MLP, for an estimated $85 million, essentially giving itself a tax-friendly way to acquire cash and speed its growth.

CST Brands has entered into definitive agreements to purchase 100% of the membership interests of Allentown, Pa.-based Lehigh Gas GP, the general partner of Lehigh Gas Partners LP, from Lehigh Gas Corp. and all of the outstanding incentive distribution rights (IDRs), the units that make up ownership, of Lehigh Gas Partners. The price will be $17 million in cash and approximately 2.044 million shares of CST common stock, putting the total value the transaction at approximately $85 million.

The deal appears to allow CST to use the tax advantages currently enjoyed by limited partnerships--a benefit that allows it to bid up the multiples of convenience stores in future acquisitions.

CST's former parent company, San Antonio-based Valero Energy Corp., spun its terminal and pipeline assets into an MLP late last year. In its announcement, CST did not comment on any relationships that could have been revived with its former parent, but the pending MLP status does on the surface seem to be a big reason behind the new alliance.

As reported in a 21st Century Smoke/CSP Daily News Flash, CST Brands will acquire the general partner of Lehigh Gas Partners and all the associated incentive distribution rights (IDRs), the units that make up ownership.

The deal creates a sponsor-backed, growth-oriented MLP vehicle and provides CST Brands with a platform for a long-term drop-down strategy for its U.S. wholesale fuel supply business and newly constructed real estate into Lehigh Gas Partners.

Drop-down maneuvers were a big part of the Susser Holdings Corp.-Energy Transfer Partners (ETP) deal in the spring. In that deal, the companies used drop-down transactions to better align common assets, such as combining the c-stores under one managing umbrella within the larger entity.

The transaction's strategic benefits:

  • Provides CST Brands access to capital through a growth-oriented MLP vehicle to execute its long-term strategic plan.
  • Drop-down asset sales to Lehigh Gas Partners and an expanded set of external opportunities at Lehigh Gas Partners to drive IDR cash flow growth for CST Brands
  • Lehigh Gas Partners gains access to a pipeline of drop-down asset acquisitions from CST Brands to fuel future distribution increases.
  • Cash flow from asset drop downs and IDRs to provide CST Brands with capital to pursue organic growth opportunities.
  • Creates a leading platform in the industry with fuel distribution and retail operations expertise.
  • Eliminates upfront costs and market risks of pursuing an MLP initial public offering (IPO) of CST-only assets.

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Part of CSP's 2014 Convenience Top 101 retailers