M&A: Multiplying Multiples
MLPs, spinoffs, low interest rates spark higher convenience store valuations, new M&A fever
By the fickle flow of luck and circumstance, the store you’re operating may suddenly be worth more today than yesterday—depending on a few variables.
Such variables could include the region, demographic shifts and whether there’s a master-limited partnership (MLP), major-oil spinoff or cash-heavy investor on the prowl near you.
Yet, buoyed by continued low interest rates and a growing pool of willing lenders, operators are seeing multiples—the measurement by which c-stores are valued—inching higher and higher, even for kiosk-only sites left over from major oil’s gas-focused business models.
“My view is that multiples remain strong,” says Dennis Ruben, executive managing director of NRC Realty & Capital Advisors, Chicago, tying the trend back to relatively cheap financing. “People can pay more if they borrow more.”
While multiples a few years ago were in the range of 5x-6x, Ruben says recent deals have been in the 7x-8x range; some in California, where many barriers to entry exist, have been as high as 11x. He qualifies the deals as involving owned real estate vs. leased, because a title to the land holds more weight than a leased property.
Still, outside of the issue of “cheap money” and the fact that businesses large and small, public or private, are under constant pressure to grow to meet ever-increasing operating costs (and to make a profit), other factors are influencing rising multiples:
▶ Spinoffs and MLPs. The tax advantages and favorable trading figures that MLPs and major-oil retail spinoffs have enjoyed puts them in a different position than most retailers, providing incentive to bid the competition out of the running. In addition, MLPs have a fuel-distribution focus, putting more emphasis on consolidating wholesale distribution and fueling contracts.
▶ Return to urban centers. A demographic shift back into America’s inner cities, especially by millennials, is spurring demand for options in what have become retail deserts.
▶ Greater demand for convenience. As more people move back into urban areas, the need for convenient access to goods and services increases.
▶ Online retailing pushing smaller-format stores. As a real-estate trend, the blending of online and brick-andmortar retailing is giving rise to smaller formats—e.g., big-box giant Walmart building Express stores.
Trends such as these often affect both buyers and sellers, leading those tempted to sell to test the waters and those hoping to grow to move past kicking tires.
Holding Different Cards
Much of the potential energy building for a new round of M&A is coming from the growing number of spinoffs and MLPs. The new entities are entering the publicly traded arena with a high degree of success, significantly enhancing their abilities to access capital, reinvest and grow, according to Roger Woodman, managing director of Raymond James Investment Banking, St. Petersburg, Fla.