Activist hedge fund Engine Capital LP, which holds 2% of Parkland Corp.’s outstanding shares, is calling on the fuel and convenience-store company to explore all strategic alternatives—including evaluating a sale or spinoff of non-core assets—to become a more focused fuel and convenience retailer.
While mergers and acquisitions have historically made sense for the Calgary, Alberta-based company, at this stage, Parkland has sufficient scale to focus on optimizing its structure, simplifying its business and becoming a best-in-class fuel and convenience retailer, Engine Capital said.
Parkland had nine acquisitions in 2021 alone, but slowed down in 2022. It’s the parent company of Parkland USA, Charleston, South Carolina, which has c-stores under several brands, including On the Run.
- Parkland USA is No. 37 on the 2023 Top 40 update of CSP’s 2022 Top 202 list ranking of U.S. convenience-store chains by store count.
Engine Capital managing partner Arnaud Ajdler and partner Brad Favreau sent a letter on March 22 to Parkland’s board of directors saying that it initially invested in Parkland due to the strength and scale of its global fuel and convenience retail network, its differentiated supply capabilities, the strength of its owned brands and its compelling valuation.
But Parkland has been unable to translate its advantaged strategic position and quality assets into adequate returns for shareholders with total shareholder returns (TSR), trailing peers like Alimentation Couche-Tard, Laval, Quebec, which owns the Circle K c-store chain, the partners said.
“Since its creation, Parkland has pursued an aggressive M&A strategy and accordingly, gained significant scale and supply advantages,” Engine Capital said. “The company today considers this vertically integrated supply strategy as one of its core competitive advantages. In its pursuit of this strategy, Parkland has accumulated a range of assets that are not typically owned by pure play fuel and convenience operators. We believe these assets create significant complexity and detract from the company’s underlying valuation leading investors to view Parkland as a conglomerate with disparate assets, instead of a pure play convenience retailer. Conglomerates typically trade at a steep discount to the sum of the parts—and Parkland is no exception.”
Investors are willing to assign high multiples to pure-play fuel and convenience retailers because these businesses are stable, predictable and cash-flow generative, the letter said.
“These same investors are not willing to value Parkland in the same way or take the time to analyze Parkland since it also owns several other assets, such as a volatile and more capital-intensive refinery, and low growth commercial assets, such as heating oil and propane distribution businesses. Therefore, if Parkland wants to be valued like a pure play fuel and convenience retailer, it should simply become a pure play fuel and convenience retailers,” Engine Capital said.
Engine Capital said the board should explore all strategic alternatives for Parkland, including monetizing or separating its Burnaby refinery and its heating oil and propane distribution business. Parkland’s multiple has steadily contracted since shortly after the purchase of Chevron Canada, which came with the refinery, the letter said.
Engine Capital suggested using Marathon Petroleum Corp. as an example. Marathon, like Parkland, operated a vertically integrated business model and, under pressure from shareholders, in 2020 announced the sale of its Speedway retail operation to 7-Eleven. After that, Marathon’s share price has increased by about 258% and outperformed peers, Engine Capital said.
Investors contend Parkland could be worth $45 per share, a 55% premium compared to Parkland’s recent price, if the board follows their recommendations.
Parkland Corp. did not immediately respond to CSP’s request for comment.
Engine Capital’s Recommendations:
- Immediately start exploring all strategic alternatives, including evaluating the sale or spinoff of non-core assets with the goal of becoming a more focused fuel and convenience retailer.
- Refresh the board of directors and add directors with convenience merchandising and capital allocation experience.
- Improve the company’s compensation framework to better align management’s incentives with shareholder’s interests.
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