M&A: Multiplying Multiples
MLPs, spinoffs, low interest rates spark higher convenience store valuations, new M&A fever
“The existing public c-store companies are trading at elevated multiples relative to historical valuations,” Woodman says. “And MLPs, such as Susser Petroleum Partners and Lehigh Gas Partners, are trading at even higher multiples of EBITDA than the C corporation companies.”
Most conventional publicly traded c-store companies, even those with a petroleum distribution segment, are structured as C-corps, while the MLP is an alternative structure that is gaining favor within the channel.
Woodman cites Lehigh’s recent closing of a nearly $100 million offering as fodder to fuel its “desire to expand its business and grow distributions to its unit holders.”
Under the tax code, MLPs must earn a sufficient amount of qualifying income, which includes profit from the wholesale distribution of refined products to convenience stores, so “there’s a lot more demand for fuel distribution acquisitions than there was in the past,” Woodman says. “That business is as fragmented as the c-store channel, and like in retail, it’s harder for smaller distributors to compete against larger companies.”
Clearly, MLPs, spinoffs and other types of industry consolidators—especially those with tax advantages, strong access to capital and significant scale—operate worlds apart from the vast majority of the industry.
Taking the example of MLPs even further, there’s clear opportunity beyond consolidating the fuel distribution side of the business.
In the past few years, a number of industry players with significant qualifying assets—such as wholesale dealer accounts and real-estate rental income from owned land leased to third-party dealers—have opted to take advantage of the tax breaks associated with the MLP structure, combined with the liquidity of publicly traded securities. Qualifying for MLP status means that the MLP isn’t subject to corporate income taxes, according to research provided to CSP by Raymond James. One of those elements can be land.
Simply put, an MLP has a “cost of capital” advantage because of its tax structure and can realize more accretion than a C-corp from acquisitions given the same price. Put another way, MLPs can often justify paying a higher purchase price relative to a non-MLP for the same assets.
Corpus Christi, Texas-based Susser Holdings is a prime example. Earlier this year, it closed on an $88 million deal to buy the 47-store Sac-N-Pac chain based in San Marcos, Texas.
Among its related businesses is the MLP Susser Petroleum Partners, which was formed in 2012. While Susser Holdings’ latest investor report did not mention sale-leaseback intentions for Sac-N-Pac, it has a history of doing so with its new builds. So far in the first quarter of 2014, Susser has completed sale-leasebacks for five stores at a cost of $19.5 million. Since its initial public offering, Susser Petroleum Partners has completed sale-leaseback transactions for a total of 38 newly built stores at a cumulative cost of $152.7 million.
Such ability begs the question of whether or not even low-volume, kioskstyle sites eventually go for unusually high multiples. The fuels distribution side of the MLP argument seems to bolster that sentiment, but larger deals always include lower-volume sites that as part of a larger package would typically go for higher multiples.
While the figures for Sac-N-Pac weren’t broken down by site, clearly, by what the publicly held company did disclose, the size of locations varied. Susser offi cials said the company plans to initially operate all 47 stores under the Sac-N-Pac brand. Over the next six to 18 months, Susser may convert some of the sites to the Stripes brand, may add the Laredo Taco Company brand to certain locations or may elect to convert some sites to the company’s wholesale dealer network.
“MLPs with their tax advantages buy at high multiples,” says Jeff Kramer, CEO of Kramer Strategic LLC, Denver. He’s transitioning from Prima Marketing, a company that sold the bulk of its chain—74 c-stores—in 2012 and 2013 to Dallas-based 7-Eleven. “And [MLPs] have a big incentive to grow because that’s what Wall Street likes to see.”
Flush with Cash
MLPs aren’t the only ones armed with tax breaks. Major-oil spinoffs of retail assets can occur tax-free. Most recently, San Antonio-based Valero spun off its 1,900-store chain into separate entity CST Brands. The move came tax-free, with shares doled out to current Valero stockholders at a rate of one share for every nine held in Valero.
While it is unclear what advantages the tax-free transition brings to future acquisition moves, it certainly helps going forward. All in all, CST Brands is positioned to grow in whatever way it decides, having $550 million in bonds, new fuel contracts that freed up $300 million in cash and a credit revolver it hasn’t touched [CSP—Jan. ’14, p. 42].