The Big Gulp
What is driving 7-Elevens thirst to acquire, and which companies are next.
7-Eleven Inc. (SEI) has orchestrated nearly 10 acquisitions in 10 states in just the past two years, snatching up small and midsize chains across the United States with a consolidator’s zeal.
More than one-half of its growth in 2011 was through acquisitions in New York, Florida, Illinois, Colorado and the Northwest. It had announced plans to add at least 630 sites in 2012 alone in the United States and Canada, with buys in Ohio, Pennsylvania, West Virginia and Wisconsin helping it reach that record-breaking target.
At a time when the nation talks about fiscal cliffs and economic retrenchment, the country’s best-known convenience chain is spending generously to feed an acquisition appetite that is peerless. In less than three years, the Dallas retailer has ballooned by about 1,000 sites, through organic growth and acquisitions, to hit more than 7,400 in the United States alone—about a 15% leap in store count. And the establishment in October of SEJ Asset Management & Investment, a Delaware corporation designed to finance expansion, underscores the promise of future growth.
Dennis Ruben, executive managing director of NRC Realty & Capital Advisors LLC, Scottsdale, Ariz., says demand for sites “is probably as great if not greater than it’s ever been.” Ruben could not speak specifically to the chain’s plans; however, in general, he says an industry feeding frenzy is taking place.
“There’s almost been a watershed event after Couche-Tard made a play for Casey’s,” he says. “Once that failed, big and small players started looking over their shoulder and really wanted to look at every deal.”
Big players who wouldn’t consider a deal for fewer than 10 locations are now interested; companies that prefer organic growth are suddenly interested in acquisitions; and those that stuck to certain regions are wandering over borders. “We have companies saying, ‘We don’t care how big or small it is; we’ll look at it,’ ” Ruben says.
7-Eleven’s most recent conquests are a who’s who of small regional giants: TETCO of San Antonio; EZ Energy of Seven Hills, Ohio; and Wilson Farms of Williamsville, N.Y. It also gobbled up some of the company’s largest licensees, such as Handee Marts, Gibsonia, Pa.; and Prima Marketing LLC, Fairmont, W.Va.
If its recent buying history is any indication of what’s to come, then future acquisitions may involve stores in the Southeast, where languishing real-estate prices, population growth and weather are pluses, as well as areas it pulled out of during its leveraged buyout in the late 1980s. Also, look for 7-Eleven to buy out remaining 7-Eleven licensees, some of which may need infusions of cash to upgrade facilities and site-level strategies; and push harder into markets in which its current presence needs a boost, especially where clusterings of stores begins to justify daily deliveries of fresh food.
“In the world of real estate and development, it has been a buyer’s market, and we have been in the enviable position to capitalize on property and space availability, plus 7-Eleven’s strong credit rating,” said Dan Porter, 7-Eleven’s real estate vice president, last May. Yet while competitive pressure may be greasing the wheels, the engine truly powering 7-Eleven’s spend ing spree seems more likely coming from within. These factors include:
- Pent-up energy and regaining ground in areas it once had sites.
- Opportunity to build density in 7-Eleven’s underdeveloped markets or growth areas such as the Mid-Atlantic and the Southeast.
- In response to overseas retail success from 7-Eleven Inc.’s Japanese parent company, Seven-Eleven Japan (SEJ), a focus on building critical mass in key markets to support a supply chain to accommodate foodservice, as well as soften the blow of advertising and administrative costs.
7-Eleven’s U.S. growth team—which includes Porter as well as Sean Duffy, senior vice president of development; and Robbie Radant, vice president of mergers and acquisitions—declined comment via the company’s spokesperson. But the outlines and direction of its domestic strategy are clear enough from talking with several franchisees and licensees, chains that have sold to 7-Eleven, and industry experts familiar with the company.
“7-Eleven is really an amazingly large real-estate company,” says Robert Buhler, president of Pleasant Prairie, Wis.-based Open Pantry Food Marts of Wisconsin, which signed a deal that gave 7-Eleven a platform to re-enter Wisconsin after an absence of nearly two decades. (See “Selling to 7-Eleven,” p. 16, for a firsthand account from Open Pantry and Prima about their decisions to sell to 7-Eleven.) “They want to own the real estate and control the corner. And they have the money to do it.”
A Time of Transition
Of all the factors fueling 7-Eleven’s resurgence as a consolidator, the idea of cycles, of businesses expanding andcontracting through their lifetime, may prove most telling.
Back in fall 1990, 7-Eleven’s predecessor, The Southland Corp., filed for Chapter 11 prepackaged bankruptcy. The proud family-run corporation experienced lows that mirrored its boom decades prior, when the land grab of convenience retail as a whole reached a heady peak. And it wasn’t just 7-Eleven; the M&A frenzy led rival Circle K to implode when debts came due.
For 7-Eleven, that late 1980s climate of hostile takeovers—including an attempt by Canadian raider Samuel Belzburg—in part led the company’s original owners, the Thompson family, to initiate a leveraged buyout. Those familiar with the company’s makeup at the time believed that its subsidiaries, which included an automotive retail chain called Chief Auto Parts; the c-store chain’s distribution, dairy and ice operations; and its refining and marketing arm with CITGO Petroleum, were more valuable sold off separately than remaining under the Southland umbrella.
That Wall Street pressure led to the Thompson family’s $4.1 billion leveraged buyout, with Southland selling many of those very assets itself to help repay the debt. 7-Eleven could have staged a comeback were it not for oil companies converting auto-repair bays at their gas stations to c-stores.
To hear people talk about that dip in the cycle is like listening to a Depression-era parent or Vietnam veteran. Innocence was lost.
Mike Scarpelli, who worked for 7-Eleven corporate during that period and recently retired from 7-Eleven licensee Alon Brands Retail, Odessa, Texas, says it was a devastating and defining period, and that it continued “in that seemingly standstill mode for a while.”
When the company’s largest licensee, Japan-based Ito-Yokado, bought 70% of the company, it became 7-Eleven’s “white knight,” Scarpelli says, especially with looming threats of hostile takeovers at the time. “They were our savior [in that they kept] the stores running, even though many of the related assets, such as the distribution centers, were sold off,” he says. “But what it did was put the company on permanent hold.”
At that point, the company seemed to be in limbo, Scarpelli says. However, part of the reason was to focus solely on the stores and reposition 7-Eleven’s systems to meet new challenges such as scanning, back-office technology and foodservice.
When CSP interviewed Jim Keyes, former 7-Eleven president and CEO, for its 2003 Retailer Leader of the Year issue, the company was still in recovery mode, even 12 years later. His goal at the time was to rebuild with “a sustainable competitive advantage.”
In his tenure at the top, Keyes invested in technology and foodservice, addressed supply-chain issues and fine-tuned its merchandise mix, while paring down what in 2005 was still $1.5 billion in debt lingering from the buyout.
Keyes left in 2005, and his successor, Joe DePinto, appears to have injected a new vigor into the process. Named CSP’s 2011 Retail Leader of the Year, DePinto and his team are credited with boosting the company’s Moody’s rating from Baa3 (in December 2005) to Baa1. They paid down debt, cleaned the balance sheet, dramatically improved cash flow, re-engineered the company bottom to top and remodeled a large portion of the system, preparing 7-Eleven for its current growth mode.
The effort did not come without hardship. Layoffs in 2009 at corporate and other cost-cutting measures seemed in line with both the economic times and current growth initiatives. But as DePinto told CSP at the time, “It’s tough now, and it’s going to get tougher really fast.”
Now, more than two decades since that bankruptcy, 7-Eleven has gone on the offensive, taking its newfound financial confidence to the street.
“Now I look at it as pent-up energy moving forward at light-speed,” says Scarpelli.