9x: That’s the estimated multiple that Susser Holdings fetched for the retail segment in the Susser-Energy Transfer Partners deal, as calculated by one analyst.
With the multiple for the entire purchase an eye-popping 10.5x, as estimated by Raymond James Investment Banking, this could easily be called the deal of the year (barring any other jaw-dropping announcements). Comparable publicly traded retailers range from The Pantry at 5.2x to Casey’s at 7.6x estimated 2015 EBITDA.
The $1.8 billion deal skyrocketed Susser Holdings’ shareholder value by 40% to $80.25 a share, setting a high bar for prime c-store assets and revealing the power of the tax-favorable business structure known as the MLP.
To say that the 630-store deal was mind-blowing may seem an overstatement for an industry that has seen big deals before, such as 2,200-store Alimentation Couche-Tard’s acquisition of Circle K in 2003 or even the purchase of 4,950 Sunoco locations just two years ago by Energy Transfer Partners (ETP). But this deal, announced in early May, is different for a number of reasons:
▶ The extraordinary multiple paid is in large part driven by the tax-preferred status ETP enjoys as a master limited partnership (MLP) operator.
▶ A family-run business, Corpus Christi, Texas-based Susser is considered a home-grown success story, a bastion of entrepreneurialism that embodies the ideals of individuality and independence within the channel.
▶ Potential on the c-store retailing side is enormous. Considering that one of the industry’s toughest challenges has been its transition from “smokes and Cokes” to offering foodservice at gas stations, Susser, with its profitable Laredo Taco Company concept, has successfully made that leap with a formula that can potentially be used across the country.
▶ Integrating Susser’s retail assets with Sunoco’s staggering 5,000 locations promises savings through increased buying power alone, estimated at $35 million a year.
▶ Texas. Need one say more? The area’s energy boom is fueling a population surge ripe for today’s c-store format, with Susser having a considerable “land bank” of properties ready to develop.
▶ And through a series of internal buybacks yet to come, the retail chain will emerge as its own separate business unit, with the expertise and scale of any comparable leading-edge c-store operator. The Susser-ETP deal shines a bright light on two critical elements facing the channel: The buying muscle behind MLPs and the raw profitability of consolidation. At that level, the annual savings after integrating general and administrative costs and the reworking of product contracts will reap an estimated $70 million a year, a significant sum that has nothing to do with actually selling more stuff.
NEXT PAGE: Deal Details
And the nature of the MLP structure, exempting it from corporate taxes for certain fuel-related activities, injects these entities with a massive dose of financial steroids. In that light, Dallas-based ETP could very well be Mr. Universe.
“[ETP] is the single most acquisitive MLP family,” says Ethan Bellamy, analyst with Milwaukee-based Robert W. Baird & Co., via email. “They are voracious and adept at financing and acquiring assets and corporations across the energy value chain, which stretches from the wellhead all the way back to the gas tank.
“I really doubt that anyone can or would outbid Energy Transfer for something that they want if they deem it to be a strategic asset, which obviously Susser is, given their solid position in Texas specifically.”
The effect on convenience retailing is only now being felt, Bellamy says. “Generally speaking, retail fuel distribution just got a lot more interesting,” he says. “If you own a station that has some value, I suspect that simultaneously your competitive dynamics just got a little tougher, but your takeout value just got a nudge higher, as well.”
Deal Details
Ever since ETP bought Sunoco and its stores in 2012, industry observers had expected ETP to make a quick exit from convenience retailing; its subsequent purchases defied that theory. However, that’s not to say ETP won’t double back to the original premise.
While the Susser deal, expected to close this summer, will make ETP the third-largest convenience retailer in the United States, it also lays out the terms for the mostly upstream investor to exit retailing by creating a stand-alone retail business that also will include the 300 stores ETP acquired in the purchase of Mid-Atlantic Convenience Stores (MACS) in October 2013.
The Susser transaction includes 630 Stripes-branded and other convenience stores in Texas, New Mexico and Oklahoma, including the 47-unit Sac-N-Pac banner Susser acquired earlier this year. This robust Southwestern network will combine with ETP’s current assets, which include the Sunoco portfolio of more than 5,000 retail stores, primarily on the East Coast. It was just two years ago when ETP, then a relative unknown in the downstream trade, acquired Sunoco’s pipeline and retail properties, including 515 company-run retail stores, a distribution network of 1,100 dealers and supply contracts for another 3,500 sites East of the Mississippi.
Sunoco operates the Aplus c-store brand and MACS, which runs its store under the Circle K banner as a “brand developer” for Laval, Quebec-based Couche-Tard.
In acquiring Susser Holdings, ETP will own the general partner (GP) interest and the incentive distribution rights (IDRs) in Susser Petroleum, approximately 11 million Susser Petroleum common units (representing approximately 50.2% of Susser Petroleum’s outstanding units) and Susser Holdings’ existing retail operations.
As part of the new structure, ETP plans to “drop down,” or sell to itself via MLP Susser Petroleum (an entity that will be within ETP), all of the combined retail businesses. This dropdown plan also establishes a means to allow ETP to completely segregate the combined retail business into Susser Petroleum, with its own access to capital and balance sheet.
In its words, according to a release about the deal, ETP plans to create a “strong and diversified stand-alone retail business that provides significant value and synergy opportunities and a platform for future growth. The anticipated Sunoco and [Susser Holdings] dropdowns into [Susser Petroleum] gives the overall retail business its own identity, tremendous scale, geographic and cash-flow diversification, while eventually separating it from ETP.”
Put simply, ETP is creating two symbiotic businesses, empowering the top retail talent from Sunoco and Susser to build a retail powerhouse with potential national ambitions that could rival 7-Eleven and Couche-Tard.
Spearheading that charge is Bob Owens, president and CEO of Sunoco Inc., who will serve as the president and CEO of the combined businesses and report to ETP CEO and chairman Kelcy Warren. Sam Susser will continue as chairman of Susser Petroleum, but at press time it was unclear what his role will be going forward or whom he will report to. Execs involved in the deal declined in general to talk about how management will be structured among the two companies.
In the meantime, the management team will combine members from both organizations to prepare for and execute the integration of the combined businesses.
NEXT PAGE: Susser’s ‘Juggernaut’
Susser’s ‘Juggernaut’
“It’s a bittersweet moment for the Susser family,” Susser said on a Susser Petroleum quarterly earnings call after the deal was announced. “We consider ourselves incredibly blessed to be a part of a team that has grown this business from a couple of stores that my grandmother inherited over 76 years ago to a Fortune 500 operation.”
Through its retail stores and fuel distribution network, Susser is one of the largest non-refiner suppliers of motor fuel in Texas, with 1.6 billion gallons sold in 2013. The focus of Susser Holdings in Texas and its neighboring states, said Sam Susser, “has allowed it to capitalize on the strong Texas economy, as well as the demographic changes occurring in these markets.”
This latest deal just underscores the multiple reasons why CSP has named Susser its 2014 Retail Leader of the Year, a recognition that will culminate in a dinner and awards ceremony at the NACS Show this fall in Las Vegas.
“Pairing Stripes and Laredo Taco Company with Sunoco, one of the great fuel brands in the United States, with the capability and resources of the Sunoco and ETP family, tees up our company for a tremendous future.” Susser said. “Combined with Sunoco’s brand, logistics, credit card and geographic reach, this company has a potential to be a truly major player, a juggernaut in the years ahead.”
(Both Susser and ETP executives declined further comment for this story pending approval from shareholder groups and approval from the U.S. Securities and Exchange Commission.)
Presumably, this isn’t the first time someone has reached out to Susser and proposed an acquisition. But what made him say yes this time?
In a conference call announcing the acquisition, Susser cited several reasons, including “shared values” between the two companies, as well as ETP’s “terrific reputation and an advantaged cost of capital and is wired 100% to grow the business, as are we.”
Saying that the status quo was perfectly fine for him and his family, Susser explained that ETP made “a compelling proposal for our shareholders at [Susser Holdings], our unit holders at [Susser Petroleum], as well as for our leadership team.”
The resulting network is an astounding achievement for a man of humble beginnings. Susser grew up in the industry, with his grandfather Sam and grand- mother Minna operating a pair of service stations in 1938. In the 1960s, father Sam Sr. and uncle Jerry Susser took over the business, eventually creating Susser Holdings. Sam Susser took over in 1988 after a two-year stint with Salomon Brothers Inc. in New York and in Dallas, working in corporate finance and in mergers and acquisitions.
The company’s retail heritage expanded in the 1990s, when Susser began licensing convenience stores, eventually operating dozens of 7-Eleven and Circle K locations in Texas and Oklahoma. In 2006, Susser rebranded all the sites as Stripes, which prior to the acquisition was the 17th largest c-store chain in the United States. Today, more than 60% of Stripes stores are home to the Susser quick-service restaurant (QSR) concept Laredo Taco Company.
The final move that pushed Susser onto ETP’s radar came in 2012. Susser retired its remaining debt as it spun off its wholesale fuels business to an MLP called Susser Petroleum Partners LP. The deal flushed Susser with greater liquidity and the trajectory to grow through M&A or be acquired at a high multiple.
Ultimately, Susser felt his best opportunity to grow the company was through new ownership.
“This [deal],” Sam Susser said, “created an opportunity to continue on our pathway to growth and investment in our core markets and leverage our brands hopefully across the country and to really build the business.”
True to that word, ETP is already making plans to exploit Susser’s sizable “land bank” of fully owned or optioned properties for development. According to Owens of Sunoco, as many as 50 sites could be developed once the ETP-Susser deal is closed, which is expected in the third quarter of 2014.
As far as the brands themselves are concerned, both Susser’s Stripes and Laredo Taco should enjoy some growth as well. While no one could give specifics during the initial ETP-Susser conference call, there are certainly aspirations to expand.
“We do see significant opportunity,” Owens said. “I will tell you that we will be very thoughtful on timing. The Stripes offering is very successful, and our vision going forward is that we will do what makes sense in specific geographies.”
Some analysts interpret this message to mean that both the Stripes and Sunoco brands could thrive under the direction and, potentially, Laredo Taco could be incorporated into larger Sunoco Aplus sites or even become a stand-alone concept in some markets.
As for signing off with ETP, Susser, in a letter to shareholders, said, “In short, this is the right combination at the right time.”
NEXT PAGE: ETP Commits to Retail
ETP Commits to Retail
The actions suggest “ETP is absolutely committed to the retail space more so than ever,” says Dennis Ruben, executive managing director of NRC Realty & Capital Advisors LLC, Scottsdale, Ariz. While admitting being surprised by Susser’s decision to sell, Ruben says the deal makes great sense for ETP. “First Sunoco, then MACS, now Susser: It’s a way to make a dramatic impact in terms of adding a lot of retail operations in their network,” he says. “It’s a new geography they’ve never been in.”
ETP came to the c-store industry as a relative unknown, a publicly traded partnership owning and operating a diversified portfolio of energy assets. Its portfolio features pipeline operations in Arkansas, Arizona, Colorado, Louisiana, Mississippi, New Mexico, Utah and West Virginia, and the largest intrastate pipeline system in Texas.
“From a retail perspective, we now have a strong platform for future growth,” said Jamie Welch, group CFO and head of business development, pointing out that the gap between ETP stores on the East Coast and in Texas leaves plenty of room for the new entity to grow.
That expansion began with ETP’s other recent acquisition of Franklin, Tenn.-based Tiger Management’s 40 Tigermarket c-stores, adding a new company presence in western Tennessee. The deal was done through Sunoco subsidiary Southside Oil Co., which ETP/ Sunoco acquired through its purchase of MACS.
“If you look at the map [of our locations], it’s fairly dramatic,” Owens said. “You may notice there’s a little gap in between. That seems like a very logical spot for us to fill in.”
Driving Multiples Up
The tax advantages inherent in MLPs appear to be driving up multiples for recently closed deals and presumably future deals to come.
Initiated as a way to promote investment in sectors that required high upfront costs, such as developing natural resources, the MLP definition eventually narrowed to energy infrastructure. Under the tax code, MLPs must earn a sufficient amount of income from designated sources, including profit from the wholesale distribution of fuel to c-stores and rental income from land beneath c-stores. Oddly enough, the code does not include the income from those c-stores. But the entities that defined Susser and continue to define ETP account for that.
Under an MLP, companies don’t have to pay corporate taxes (i.e., double taxation), providing a “cost of capital” advantage that makes investment appealing. In the April 2014 issue of CSP, Roger Woodman, managing director of St. Petersburg, Fla.-based Raymond James, said the advantage means MLPs can justify paying a higher price than non-MLPs for the very same asset.
At press time, lawmakers in Washington had begun questioning the fairness of the MLP structure, but no action has occurred, with similar reviews in the past resulting in no substantive change to the tax code.
The resulting M&A environment has put MLPs up against each other in the bidding process. Officials with Lehigh Gas Partners, Allentown, Pa., which recently acquired Petroleum Marketers Inc. for $61 million and the BP assets in the Chicago area and northwestern Indiana for $38.5 million, admitted in a recent quarterly call that it had run into competition with ETP, specifically on the MACS and Tigermarket deals.
But in going up against ETP, Lehigh has stuck to its strategy and “maintained [its] discipline” on what it will bid, said CEO Joe Topper in a recent earnings call. ETP drove prices to the “higher end” in deals that Lehigh did not get, he said.
“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,” he said.
He concluded, “I don’t think it’s an ever-increasing trend. I’m pretty sure of it because the two transactions that we did are market appropriate.”
He said that Lehigh Gas is looking at “eight or nine” acquisition deals, and that “the acquisition pipeline is still good.”
Although the deals may not happen soon, Topper said they “are out there, and if it’s the right deal, we will go after it. … Every deal we announce brings two or three more out of the woodwork—[sellers] want to talk to us because it expands the market that we’re in. So I’m quite optimistic.”
NEXT PAGE: The Players at a Glance; A Competitor Responds
The Players at a Glance
Energy Transfer Partners
Headquarters: Dallas
Revenue: $47.7 billion
Portfolio: More than 5,000 convenience stores and related fuel supply business, including the Sunoco retail and fuel brand; natural gas operations that include more than 17,500 miles of gathering and transportation pipelines, treating and processing assets and three storage facilities located in Texas; and 70% interest in Lone Star NGL LLC, a joint venture that owns and operates natural-gas liquids storage, fractionation and transportation assets in Texas, Louisiana and Mississippi.
Susser Holdings Inc.
Headquarters: Corpus Christi, Texas
Revenue: $4.3 billion
Portfolio: Operates 580 Stripes-branded c-stores in Texas, New Mexico and Oklahoma, offering merchandise, food, motor fuel and other services. The company owns 50.2% of Susser Petroleum, which was the company’s original wholesale business and became an MLP in 2012.
Source: Energy Transfer Partners and Susser Holdings
Mapping Out the Susser-ETP Deal
The ETP acquisition of Susser brings two separate platforms of c-stores—essentially the East Coast and Texas—under one roof, with potential to grow in between and westward. Clearly, each platform has strengths that the other can take advantage of, with Sunoco bringing its muscle on the fuel side and Susser making almost double on inside sales with only an eighth of the stores that Sunoco has.
| Operated Sites | Sunoco | Susser | Total |
| Owned*, company operated | 553 | 630 | 1,183 |
| Owned*, dealer operated | 576 | 90 | 666 |
| Dealer and distributor operated | 4,023 | 526 | 4,549 |
| Total sites | 5,152 | 1,246 | 6,398 |
| Key Business Metrics | Sunoco PF 2013** | Susser 2013 | Total |
| Motor fuel sales (millions of gallons) | 4,735 | 1,578 | 6,313 |
| Merchandise sales ($ millions) | $616 | $1,066 | $1,682 |
| Fuel margin ($ millions) | $524 | $229 | $753 |
| Merchandise margin ($ millions) | $160 | $361 | $521 |
| Other margin ($ millions) | $89 | $54 | $143 |
| % of retail margin from fuel | About 65% | About 35% | About 50% |
| EBITDA*** ($ millions) | $325 | $169 | $494 |
Source: Energy Transfer Partners
* Includes both fee and leased sites
** 2013 pro forma for full year of MACS acquisition, except for EBITDA, which reflects actual results
*** Earnings before taxes, interest, depreciation and amortization
Big Deal, Bigger Drag: A Competitor Responds
On a spring earnings call, officials with competing MLP Lehigh Gas Partners, Allentown, Pa., commented on the Susser-ETP acquisition, saying, “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.”
Dave Hrinak, president of Lehigh Gas, said, “But we focused on the deals in the $25 million to $75 million range, and I think that [deal] really won’t affect that size transaction for us.”
Hrinak called the ETP-Susser deal, which will combine the Sunoco and Stripes retail networks, “a wonderful transaction for both companies. I think the way they’re structuring it—where they’re going to be more efficient with their earnings and distribution through the partnership—is a good idea. …. So in many ways that model is kind of like what we’re doing.”
Formed in 2012, Lehigh Gas Partners distributes fuel to more than 1,100 locations and owns or leases more than 625 sites in 14 states.
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