A Channel in Transition
As we look ahead into the new year, the c-store and downstream petroleum markets are abuzz with capital and consolidation.
Fuel distributor Lehigh Gas Partners of Allentown, Pa., has launched an initial public offering expected to generate at least $105 million, and Susser Holdings is proceeding rather nicely with its master limited partnership of spinoff Susser Petroleum Partners. (See our in-depth report on MLPs on p. 64).
Regional refinery giants Murphy Oil and Valero Energy recently declared plans to divest their retail divisions. It’s rumored that pipeline powerhouse Energy Transfer Partners, which earlier this year acquired Sunoco Inc. for $5.3 billion, will liquidate the Philadelphia operator’s vast retail network sometime in 2013.
7-Eleven Inc. has further distanced itself as by far the largest c-store operator in the United States, completing a slew of deals involving Tetco, Handee Marts, Open Pantry, EZ Energy and Prima Marketing. And expect its activity to ramp up. As we went to press, Tokyo-based parent company Seven & I Holdings Co. announced it will start a new company in Delaware, SEJ Asset Management & Investment, to use its robust capital engine to support the Dallas-based retailer’s ambitious growth strategy.
MLPs. Divestitures. Rank-and-file selloffs. Why is this all happening now? And what does it portend for our industry?
Several factors are converging, some that will hit the privately owned, family-run operators, and other that will yield a sea change in the ranks of the big and growing.
Capital gains tax rates on long-term gains and qualified dividends expire Dec. 31. Starting next year, the tax rate on long-term gains will be 20% (or 10% if a taxpayer is in the 15% tax bracket). Also, effective Jan. 1, the distinction between ordinary and qualified dividends will disappear, and all dividends will be subject to the ordinary tax rates.
Many older operators, particularly those operating five to 50 stores in our channel who lack a clear succession plan, are discreetly passing the word around that their business is for sale in the hopes of taking advantage of the rapidly closing tax window. One senior exec at a large regional chain said his company has fielded an impressive list of c-store businesses looking to sell. If his company were a wheeler-and-dealer, it could have accrued hundreds of stores this year: “What we’re asking ourselves is what is the right multiple, and would this deal advance our retail network? I can tell you that there are more sellers than buyers right now.”
And oil and retail is the new oil and water. Valero, Susser, Murphy, Alon and other refiner-marketers and distributor-retailers are pursuing MLPs or other tools to separate their fuel and retail businesses. Operators with large distribution networks are realizing a fresh injection of capital by launching IPOs, catering to investors seeking solid yields for what is a largely stable downstream complex of pipelines, terminals and distribution.
The next big consolidation will involve wholesale fuel marketers. Expect moderate to midsize distributors to come together as an MLP. This will yield fewer yet larger, better capitalized marketers who will look to build extensive retail networks to secure higher throughput. This could further squeeze smaller jobbers as they compete against larger rivals with superior cash reserves at significantly lower interest rates.
Put another way, this is phase two of the c-store divestiture. First came that of Big Oil, with BP, ExxonMobil, Shell and ConocoPhillips selling off thousands of stores. Now it’s the regional refiner-marketer’s turn to liquidate as Valero and Murphy and others line up, eager to fully capitalize on what they know best: fuel.
This will mean a new glut of retail assets flooding the market. It will mean a fresh wave of equity interests speculating in the convenience channel. It will mean that traditional players such as 7-Eleven, Couche-Tard and major regional retailers with robust revolving funds will maximize their corporate value and leverage their scale, securing more lucrative long-term fuel agreements on the forecourt and favorable marketing and pricing arrangements on the backcourt.
The c-store and retail petroleum industry is about to wade into dramatic territory. While consolidation has long existed, the industry is about to embrace a change of unprecedented proportions.