Liquidity: the gold at the end of a long and rewarding life of hard work, saving and investment.
For many retailers, their convenience stores are their life’s bet, not a buy-yourself-a-job business but a value-generating lockbox that they hope will reap a greater payday than treasury bills or CDs.
It’s an investment that’s also meaningful in other ways: the livelihood for dedicated employees, a necessary public service or a bedrock for charitable work.
“A lot of [c-store chains] are established, multi-generational pillars of the community and important family enterprises, as opposed to the Wall Street ‘startup with an exit’ approach,” says Todd Anderson, principal with 1CapitalPartner, Orange County, Calif. “That’s one of the things I like about this business: A lot of times they’re companies that take their position in the community and their businesses seriously.”
And it would be an overreach to suggest that a family-run chain is going to evaporate under competitive pressures and lavish opportunities to exit. That said, at the core of every living enterprise is the generation of wealth. And when disparate forces align to push c-store multiples to historic highs, it may be time for many to sell.
Some of the main pressures supporting a seller’s market include:
Low Interest Rates: The need to pull out of a dramatic recession has led the Fed to suppress interest rates and keep them low for several years.
MLPs and Higher Multiples: The tax advantages brought on by the relatively new MLPs have pushed multiples into double digits, even though they’ve historically hovered in the range of 5x to 6x.
High Gas Margins: The precipitous drop in oil prices has buoyed many retailers with higher-than-average fuel margins, improving store revenues and the value of wholesale contracts.
Other Buyers and Defensive Buying: The industry’s traditional consolidators, namely 7-Eleven and Circle K, continue to participate in the bidding process despite MLPs throwing their weight around. Most notably, Laval, Quebec-based Alimentation Couche-Tard and its Circle K chain bought Cary, N.C.-based The Pantry in a $1.7 billion transaction announced late last year. But some purchases may be less about growing a strong network and more about locking others out.
Given these unprecedented developments, Gregg Budoi, the former CEO of EZ Energy, a 67-store chain plus dealer network that sold to Dallas-based 7-Eleven in 2012, says the clock is ticking.
“If I were a family business and wanted to sell in five years, I would be thinking that I probably couldn’t get more for my business than I would today,” says Budoi, now executive vice president and CFO of Kalibrate Technologies, a pricing and market-planning firm with U.S. offices in Florham Park, N.J., and Tulsa, Okla. “I’d think my five years just got compressed to two.”
CONTINUED: Making Yourself Attractive
Becoming Attractive
In laying out parameters for what makes a c-store business attractive to a buyer, Jeff Kramer, a former retailer who also sold his 89-store Prima Marketing chain to 7-Eleven in 2012, says many of the key attributes are set. Property size, location and ownership of the land are starting points. Traffic count, competition, store size and cash flow are big factors as well.
“A decent store size is important,” Kramer says. NACS stats put industry averages at 2,400 square feet and more modern stores at 5,000 square feet. “Even if your sales aren’t huge, a larger store size provides the potential to do more volume without knocking down and rebuilding the site.”
Fuel continues to be important, especially with the rise of the MLP, says Kramer, now a managing director with Chicago-based NRC Realty & Capital Advisors. The MLP structure bases much of its income and tax advantages on wholesale fuel margin and the location’s rent.
But the most compelling factor affecting c-store value, Kramer believes, is foodservice.
“The demand for convenience is still strong, but that business is not growing by huge amounts,” he says. “If you win consumers’ stomachs, it’s easier to win where they fill up for fuel and other convenience items.”
Calling the transition from convenience to foodservice “more difficult than going from fuel to convenience,” Kramer says operators building tomorrow’s c-stores won’t consider sites based on convenience rules, but by prioritizing foodservice.
Still, whether or not foodservice remains a cornerstone, the goal is to build and then demonstrate value, says Budoi of Kalibrate: “There’s a reason you build a store, run it the best way you can and invest like … you’re going to own it and your grandkids will own it.
“[You shouldn’t be] wondering if you can sell it. You should be in it for the long haul.”
Whatever a retailer builds or invests time in should be “accretive to the enterprise value and add to the value of the overall chain,” he says.
CONTINUED: Deciding to Sell
Deciding to Sell
A misconception of sellers is that their businesses are on the decline. “You should be on an offensive strategy, not defensive,” Budoi says. “Selling in a defensive mode won’t get the best value for your business.”
Retailers have to continually evaluate their assets, forecast sales and spot market shifts. Budoi says questions to ask include: Who is threatening me? Is it a direct c-store competitor or a quick-service restaurant (QSR)? Is the population growing or shrinking? To create enterprise value, should I buy another chain? Build stores? Close unprofitable or marginal stores that are detracting from my brand? What’s the capital expenditure? Should I raze and rebuild? Divest?
“So it’s not really any one thing,” he says.
Continuing evaluation often helps retailers decide if they’re becoming buyers or sellers, says Ruben of NRC. “If we can’t be buyers and grow, we should be sellers,” he says. “Standing is still OK. There are many family-owned companies with 20 to 25 stores that grow by one store a year. That’s fine. But to be competitive with your peers and move the needle, you’ve got to be more.”
When Kramer sold his business, the time was right, he says. The multiple owners were ready for a “liquidity event.”
At the time, Kramer’s chain needed improvements and capital was tight. While he could have considered merging with another company and reducing overhead, the logical choice was to sell, especially because he found a buyer in 7-Eleven with a solid bid.
“If valuations had fallen, we might have lost money by holding on,” Kramer says. “There’s no guarantee.”
CONTINUED: Why The Pantry Sold
Why The Pantry Sold
Beyond selling when the company is at peak value, retailers also have to estimate whether they can be viable five or 10 years down the road.
Successful foodservice stories such as those of Wawa, Sheetz or QuikTrip were years in the making, with corporate committed to the transformation of the chains.
Some companies aren’t driven to grow at that magnitude. For instance, when you’re a publicly traded company, “you have quarterly earnings pressure and valuations and growth demands,” says Anderson of 1 CapitalPartner. “It calls for a different set of decision-making criteria vs. a typical family-owned [or private] company.”
For example, demands on earnings plagued The Pantry for years, even as it sold low-performing assets, upgraded stores and reinvented its coffee and foodservice offers.
“Convenience is a hard industry [in which] to be publicly traded, because [Wall Street] likes consistent earnings,” says a former longtime employee of The Pantry, who spoke on condition of anonymity. “It’s a cycle where earnings vary. You lose in a rising fuel market and make money in a falling one. When they go up and down, you don’t know, so it’s good to be public as a way to get capital, but it’s hard to sustain your stock price.”
In such an environment, becoming the next Wawa was not in the cards for The Pantry. Exacerbating the company’s recovery efforts, says the former employee, was that for years “no one felt there was c-store knowledge at a high level,” with senior management backgrounds outside of convenience.
Dennis Hatchell, The Pantry’s current president and CEO, was able to provide strong fiscal controls, but via measures having less to do with innovation and transformation and more to do with holding the bottom line, the former employee says.
Selling to Couche-Tard was a wise choice, the source says: “With [gas] prices falling, you’ll get that profit now, but we’ll see tight margins again. So it’s a perfect time to sell. … You don’t have to worry about your capital issues or to be competitive and grow.”
For Couche-Tard, the Pantry deal had many pluses, Kramer says, including the fact that Couche-Tard’s stock price has stayed strong, partly because of acquisitions. The deal was also a rare one. “There are few acquisitions Couche-Tard could make with 1,500 stores,” he says. “But it’s also not easy to write a check for 1,500 stores.”
Similarly, the Speedway-Hess deal made a lot of sense to Kramer. “Marathon has sizable refining and distribution capacity that brought synergies, plus there will be significant savings on overhead,” he says. “The hot market caused [Speedway] to pay a high multiple, but that volume of assets would take a long time to build.”
As for the ETP-Susser deal, Budoi of Kalibrate says the diversification of Sunoco from the Northeast into Texas was an “excellent” opportunity, allowing expansion into “one of the few organic growth populations in the country.” For the CST-Lehigh deal, Budoi says the fit of the networks and growth for the MLP partnership was strong and reveals a geographically diverse, national vision.
For Dallas-based Empire Petroleum and its recent growth in wholesale supply, Budoi sees it not as a focus on scale or buying power, but an expansion of fuel delivery options and building a more flexible system.
“I see all of them as strategic fits for various reasons,” Budoi says. “It’s not growth for growth’s sake. It’s thoughtful.”
Buying to Flip Though recent acquisitions have had solid foundations, Budoi agrees that money can be made in the exercise of buying and selling, especially with c-stores. He sees the business as three concepts under one roof: c-store, fuel and real estate.
With the real estate, a retailer can do a sale-leaseback and make a return. Then with the motor fuel, he or she can flip it into an MLP or dealer network and monetize the fuel-income stream. With the c-store, a retailer can franchise and sell the retail asset.
“It’s great if I can make a Wawa,” Budoi says. “But if I can’t, I can still get my returns by [selling] the various components.”
In many cases, big buyers turn around and become sellers, because many of the larger portfolios inevitably include stores that don’t fit the buyer’s model. “People who want to sell a company want a complete exit,” Ruben of NRC says. “They don’t want to sell just 20 or 30 stores, while a buyer may not want all 100 stores.” In such a case, Ruben says the buyer typically identifies the unwanted stores and puts them up for sale.
But is there a market? Anderson of 1CapitalPartner believes so. Through the early 2000s, the major oil companies sold off record numbers of company-operated stores. In that period, many buyers appeared, taking the steps to become a qualified bidder.
Of course, not everyone won. But those left empty-handed had “gone through the drill of [understanding] financial reporting, capital availability, management teams, what markets are significant for them, what growth means and how they want to grow,” Anderson says.
If, however, the due diligence were to point toward being a seller, Anderson cautions retailers to not lose sight of day-to-day operations. “A sale can be hugely distracting,” he says. “You’re close to a payday, and it can be a distraction to the core business.”
With the time frame of any transaction often taking months, any drop in sales could affect the final selling price, Anderson says. “If you don’t keep focused on operations, it can impact negotiation leverage and valuation as you approach the close.”
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