In the summer of 2014, Kim Lubel was trailblazing across central Pennsylvania and upstate New York. She was homing in on the acquisition of a highly respected, family-run convenience chain in the Syracuse area and an agreement with a Lehigh Valley fuel distributor for the rights and tax advantages of its master limited partnership.
Lubel, the indefatigable and charismatic head of Valero Energy’s retail spinoff, CST Brands, was riding high. She talked passionately about a dynamic retail network built on smart acquisitions and new ground-ups.
Speaking on the heels of CST’s purchase of Nice N Easy Grocery Shoppes in August 2014, she said, “We don’t see this deal as a one and done. This is about building a footprint for us to grow across the United States.”
Almost two years to the day of its Nice N Easy deal, CST Brands, operator of about 2,000 stores in the United States and Canada, announced its own acquisition. The purchaser was a company permeating not just North America but parts of Europe, too: Alimentation Couche-Tard, proprietor of the Circle K brand.
CST’s story is not like that of The Pantry, Swifty Serve, Clark Enterprise, Convenience USA or Dairy Mart—rapid-fire M&A chains ruined by intolerable debt, gross mismanagement or operational incompetence.
CST was a good chain with good people and a compelling story. So what happened from the summer of optimism just two years ago to this past summer of its sale?
Many industry observers were surprised at how fast CST went from one end of the spectrum to the other. “CST was expanding and doing well,” said one Texas consultant who requested anonymity. “That’s what most of us thought.”
If the underlying question is why, then the tide beneath it is regret.
Consider again the promise. San Antonio-based CST Brands and its Corner Store concept made aggressive strides over the past two and a half years in foodservice: a baked-goods strategy with signature items, such as its whoopie pies and breakfast kolaches, and an even more expansive menu in play for larger-format test stores in Texas that included stromboli, pizzas and subs. These were well-crafted, field-tested offers.
On the M&A front, no one can forget the one-two, MLP-inspired coups of food-first Nice N Easy in upstate New York—where the acquisition was as much about intellectual property as it was about scale—and similarly with tech-forward Flash Foods in Georgia.
Then factor in Kim Lubel, formerly Kim Bowers, stepping onto the stage in 2013 as the first female president and CEO of a major convenience-retail chain. She broke through the company’s rigid, big-oil heritage, calling for greater accessibility, casual attire—even welcoming facial hair, which was previously barred. She garnered favor at all levels, with her legal acumen impressing 8investors and her fluid Spanish making her the darling of front-line employees. More important, she articulated a food-centric, big-format vision that has become the hallmark of today’s c-store innovators.
Yet even though she grabbed the reins of this multiformat behemoth with grace and authority, it took a mere 10 months for the promise to evaporate.
Continued: Beginning Of The End
BEGINNING OF THE END
Roughly one year ago in the Southeast, Laval, Quebec-based Alimentation Couche-Tard was preoccupied with turning a poorly run chain of 1,600 Pantry stores into a profitable opportunity. And ever so quietly, it was turning an eye toward CST Brands.
At the same time, in the southeastern corridor of Texas, publicly traded CST Brands was facing a surprising mutiny from a few institutional shareholders who said its leadership wasn’t doing enough to create value.
It would have been hard to predict in the fall of 2015 that the internal and external threats would ultimately force CST Brands to invite bidders and, ultimately, sell. And that the buyer would be none other than its original suitor, Couche-Tard.
But a deeper review of the two chains suggests an inevitable marriage between the merger-and-acquisition specialist made up of semiautonomous, regional bases and a retailer that, while weighted in excessive general and administrative (G&A) expenses, was actually delivering solid results—just not enough to excite anyone focused strictly on quarterly earnings and high returns.
The final chapter took 10 months and $4.43 billion in which to unfold, with CST Brands defiantly hoping to retain its independence but finally acquiescing to the overtures of its long-stymied suitor.
The unsolicited courtship began Oct. 20, 2015. CST Brands’ stock was trading just less than $35 per share when Couche-Tard formally made its intentions known to the CST board. The Canadian company submitted a tentative cash offer of $43.50 to $45.35 per share, promising a solid return to CST shareholders.
This offer, news of which surfaced only in late September when CST filed its proxy statement to the U.S. Securities & Exchange Commission (SEC), has stirred debate and reflection among institutional investors of CST stock.
That initial offer—summarily rebuffed by CST’s leadership—was tendered about six weeks before dissenting CST stakeholders went public with concerns that the retailer’s stock was grossly undervalued and that management was underperforming.
Two parallel storylines apparently played out unbeknownst to everyone but CST management and possibly one or two investment groups:
- Though initially repelled, Couche-Tard returned in December with a higher offer of nearly $47 per share and, after yet another rejection, came back in early January 2016 with a $48.50-per-share bid and a threat to make the offer public.
- Meanwhile, dissenting stakeholders Engine Capital and JCP Investment Management—as well as other shareholder groups who provided exclusive interviews with CSP magazine over many months—privately stepped up their criticism in January. Rallying against CST management, they accused Lubel and the CST board of lacking a cohesive growth strategy, overpaying on certain acquisitions and failing to demonstrate confidence before an increasingly concerned shareholder base.
With the SEC proxy filed and all the background now revealed, the moods of several shareholders and parties close to the scene range from resignation to anger.
“Frankly, I’m pissed that Couche-Tard had made a bid in October [2015] and that it took weeks before there was a formal response,” said one stakeholder, who spoke on condition of anonymity because the sale has not been formally finalized. “It seems that management sat on the offers by Couche-Tard, with hopes that they would go away even though the offers were reasonably above the stock price.
“My sense is that [Lubel’s] strategy would have been to hold onto [CST Brands] but that she finally felt the pressure from the dissenters and that Couche-Tard might force a hostile takeover bid.”
Another CST investor was less harsh, though obviously not pleased: “Once Couche-Tard showed interest in CST, that would have been a good time for management to adopt financial discipline measures to cut G&A and enhance our total value. I’m not unhappy with the final price, but I believe we could have gotten more had we been more aggressive in cutting out the fat.”
To that end, it is striking that once CST launched a strategic outreach in March welcoming outside bids, Couche-Tard remained incredibly disciplined, not flinching from its earlier offer of $48 to $48.50 per share.
“This deal could have been done months earlier,” said another source with an interest in the deal. “Once Couche-Tard made its opening offer in October 2015, that should have triggered negotiations. Instead, endless legal bills by CST yielded absolutely nothing in the auction and probably cost them $20 million to $30 million in fees.
“It’s easy to look back and say CST should have been talking to Couche-Tard all along,” the source continued. “It’s also obvious that CST didn’t want to sell, that they wanted to run this thing. It’s also clear to me that Couche-Tard really knew the value of the company and stuck to their guns.”
CSP reached out to officials at both CST Brands and Couche-Tard for this story but received no response.
One could defend CST’s management team, arguing that the company believed it would deliver greater long-term value to shareholders by remaining independent and focusing on tuck-in acquisitions, new-to-industry (NTI) ground-ups and expanded foodservice offerings. While still saddled with hefty G&A, the company had won modest praise for in-store improvements and overall upgrades since it was spun off by Valero Energy in 2013.
But another shareholder is not so forgiving.
“I don’t believe the leadership would have been able to achieve this level [of stock value],” he said of the accepted bid. “In the end, we received what is probably at the floor of what is an acceptable price. It wasn’t $50 a share but it was close enough.”
With CST essentially bowing to the two-pronged pressure of dissenting shareholders and the advances of a strong consolidator, the next question becomes one of time. Did CST leadership ever have enough runway to take off?
Some think not. “They would have needed five, 10, 15 years of hard work,” says a successful foodservice-focused, convenience retailer who spoke to CSP on condition of anonymity. “It’s difficult for companies that come from big oil to make the pivot to being true retailers and distributors.”
To its credit, CST was able to quickly execute a game plan to boost shareholder value from both an M&A and an operational perspective, not only launching new, larger-format construction, but also quickly transferring foodservice and grocery knowledge into test stores. After the acquisition of Nice N Easy, CST quickly named Jack Cushman, the Canastota, N.Y.-based chain’s executive vice president of foodservice, to lead its own program.
In early 2016, five Corner Store locations opened in Texas featuring the menu found at larger Nice N Easy stores. The makeover included a bright-green Corner Store logo and a plan to rebrand 21 NTI and legacy stores in San Antonio with the “fresh and relevant” brand. “Market” would be added to the logo at larger stores to imply a wider assortment of groceries and foodservice.
In an interview with CSP in fall 2015, Lubel said the company goal was to have a national network of rebranded stores by 2020.
What actually materialized was 42 NTI stores in North America built last year and plans for 55 to 65 this year, with a total of 76 NTIs included in its “core” same-store reporting for its second-quarter 2016. The company’s NTIs and recent acquisitions, including Flash Foods, helped bring in $68 million more in merchandise and services sales, with officials citing that the increase also included “strategies designed to add business in the packaged beverages, fresh foods and grocery categories.”
In February of this year, Hal Adams, president of retail operations for CST Brands, expressed tremendous optimism for the company’s new foodservice program, saying its higher-margin food mix grew to 30% of in-store sales. NACS SOI averages put foodservice at 20.9% of in-store sales.
But ultimately, same-store quarterly results were solid to underwhelming. (See comparisons on p. 31.)
CST stock, meanwhile, traded in the range of mid- to low $30s per share for much of 2014, and it rose to the lower-to-mid-$40s range in the early part of last year as it continued its acquisition activity. But as of the second half of 2015, it began dropping back into the $35 range.
At the time of the initial Couche-Tard offer last fall, CST was in the midst of securing new acquisitions, looking for buyers for its California and Wyoming assets (which it finally sold to 7-Eleven this past summer) and getting the test of its expanded foodservice program up and running in San Antonio.
In quarterly investor calls, Lubel and Adams would stress that revenues were off because of falling retail-fuel prices—as was the case for the rest of the industry. It had dropped 30%in the second quarter this year vs. 2015. They emphasized improved sales inside the stores, although the best news was coming from new builds vs. the chain’s smaller legacy stores (which was a little less than half, or about 820 CST locations, by CSP’s count).
Then in December, concerned shareholders began demanding performance improvements.
Investor agitation continued into the new year, culminating in March’s settlement with dissenting stockholders and Lubel handing over the CST keys to its new owner.
SPINNING PLATES
In CSP’s coverage of the freshly emerging CST Brands back in January 2014, editors posed the very questions of fortitude and speed amid a return-hungry investor community.
“Dubbed from the outset as a single-digit, ‘slow growth’ investment by many financial houses, the fledgling CST network has a lot to prove” [CSP—Jan.’14, p. 40].
With enough time, could CST Brands have reached both the quality and quantity it was aiming for? Were its acquisitions based on intellectual property a smart strategy?
The industry will never know.
Monumental change needs to occur to convert large chains such as CST from convenience-centric to foodservice-forward, says Greg Jones, consulting partner with b2b Solutions, Lake Forest, Ill. He was part of such a change at Corpus Christi, Texas-based Stripes, which took 15 years to go from three foodservice stores to hundreds.
“It’s a cultural and operational change [for retailers] to thinking like they’re a restaurant,” Jones says. “If you think you’re a c-store, you’re going to treat [foodservice] like it’s a case of beer.”
Going forward, Couche-Tard said the new CST acquisition would become its own business unit, with CST’s new distribution center in San Antonio remaining a strong supply hub.
Officially, Couche-Tard has said the question of Lubel staying within the organization has yet to be answered, but sources tell CSP that she will not continue with the company. And as with any buyout, eliminating duplicated positions is the very definition of “creating synergies.”
“[CST] sold to a giant company that can eliminate a breathtaking amount of expenses,” says the c-store foodservice retailer.
“They’ll achieve synergies and it will be a good fit.”
It’s likely Couche-Tard will cut G&A and employ its vast buying power, but might it leverage some of CST’s foodservice acumen?
“The capital and the culture change required to switch would be pretty ugly,” says Jones, who considers Couche-Tard primarily a roller-grill company, despite some testing of broader prepared-food offerings. “Circle K over time has acquired foodservice [retailers], but that didn’t seem to budget into [their] national model.”
Jones isn’t alone in his opinion. Formerly with Nice N Easy, Fran Duskiewicz of FS Dusk Consulting Services, Naples, Fla., says Nice N Easy’s late founder, John MacDougall, was immensely concerned with the innovative culture he nurtured at his chain and was determined to sell only to a company that would ensure that spirit survived.
“CST appeared to be purchasing companies that were outstanding performers in areas where they felt they could use expertise in building a bigger, better company,” Duskiewicz says. “It wasn’t the usual plan to acquire and strip away all the G&A and absorb profit.”
But integrating best practices from an acquired business of 33 stores and rolling them into a network of 2,000 and beyond would be costly and time-consuming. “If the goal is also to get 2,000 stores upgraded to better foodservice, build bigger stores, change technology, it’s quite a ramp-up of your own operation,” Duskiewicz says. “It would require time, patience and money. In the public sector, investors typically do not have the stomach for that.”
Continued: Becoming No. 1
BECOMING NO. 1
Whether any of CST’s intentions survive as Couche-Tard takes over is but one detail in a complex story to be told. What is clearly important to Couche-Tard and its venerated co-founder Alain Bouchard is that it has achieved something not considered possible but a decade or two ago: to become the largest convenience chain in North America.
With 10,746 stores in the United States and Canada, Couche-Tard now surpasses Dallas-based 7-Eleven and its 10,500 locations as the No. 1 c-store on the continent.
The CST buy also firmly replants Circle K back in the home turf of 7-Eleven, with major outposts in Texas markets such as Dallas, Fort Worth, Houston and San Antonio. While the stores CST purchased in states such as Georgia, New York and Wisconsin, as well as CST stores throughout the South and Southwest, are noteworthy, they represent only a small, less dominant portion of the CST network.
But securing Texas further positions Couche-Tard as a formidable industry consolidator, one now equipped with an MLP in CrossAmerica Partners, which came as part of the CST purchase.
THE WALGREENS OF CONVENIENCE?
Fifteen years ago, nary a U.S. operator or vendor had heard of Alimentation Couche-Tard. Based north of the border, the chain’s leader—who began as a single-store operator—aspired to create something great and lasting. That would mean penetrating the American marketplace, where the competitive landscape was fierce and the consumer more fickle.
When Couche-Tard purchased the 225 Bigfoot retail assets in 2001 from Indiana-based Johnson Oil Co., many industry experts paid little attention, and fewer would ever have guessed that this would be just the first of many eye-raising acquisitions driven by its CEO and M&A ace, Bouchard.
Bouchard, now board chairman, has built the largest convenience operator in North America. And while the c-store landscape has been abuzz in recent years with new players—from MLPs to investment bankers and equity firms—Couche-Tard is old school, a true c-store at heart that has mastered the art of supply-chain logistics, the complex world of financial liquidity and extraordinary discipline.
“What is really impressive about their acquisition of CST Brands is that they never flinched from the offer they made months earlier before CST solicited bids,” one investor said on condition of anonymity. “They were going to pay an 8-8.5x multiple. They were not going to engage in a bidding war.”
And while Couche-Tard first courted CST back in October 2015, Bouchard’s initial play was more than 20 years ago.
“I met with the CEO of [refiner-marketer and Valero subsidiary] Ultramar in 1995 and I tried to convince him to join me and make a privatization play,” Bouchard told CSP in an exclusive interview last month. “They were not interested in doing that. I tried for many years to buy them out. We met with Bill Klesse, the former Valero CEO, four or five years ago, and we tried to convince him to sell their retail to us. He said no, and a few years later, they decided to do the spinoff.
“It’s another long story about patience.”
Of meeting Bouchard, Dick Meyer, president of Meyer & Associates, Mesa, Ariz., says, “He impressed me quite a bit with his retail knowledge, his understanding of operations and his ability to execute.”
When Meyer assesses the dramatic consolidation taking place in a historically fragmented channel, Couche-Tard stands out.
“The secret of Couche-Tard is common sense. … There are absentee owners, there are short-term investors,” he says. “Couche-Tard brings integrity, passion, consistency, a track record and real common sense.”
Continued: Circle K vs. 7-Eleven
Circle K vs. 7-Eleven
Couche-Tard’s purchase of CST Brands this year and the 1,500 Pantry stores in 2014 have vaulted Circle K to the No. 1 spot in terms of store count, past 7-Eleven, in North America.
Scale is certainly a competitive factor, but here’s how the companies stack up as operators.
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