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2018 Top 202: Shareholders Make Waves

Why are c-stores becoming more of a focus for activist investors?

NEW YORK -- Investors across the stock market have increasingly become more vocal, demanding stronger returns on their investments, and the convenience-store industry has not gone unscathed as a result.

The beginnings of this "shareholder revolution,” according to a report by the Roosevelt Institute, a New York-based thinktank, came in the 1980s, when changes in management practices, finance theory and government regulations led owners of corporate stock to expect larger payouts. In the 1970s, corporations in general kept 50% of profits for research and development, equipment and training, turning the rest over to shareholders. By 2017, payouts averaged 90% of reported profits.

“In short, the relationship between the flow of profits and borrowing for corporate investment has weakened as borrowing and shareholder payouts has skyrocketed,” the report said.

For c-stores, the most recent manifestation of what researchers Mike Konczal and Kathryn Milani call "short-termism" has been incidents of shareholder activism. Instead of an old-school corporate raid a la Carl Icahn or T. Boone Pickens, activist shareholders today need hold only a small position in a company to “seek dramatic, strategic changes,” says Duncan Herrington, managing director and head of activism response and contested situations for Raymond James, St. Petersburg, Fla.

As Herrington describes it, the shareholder group talks to other shareholders beforehand, detailing why a company’s stock is undervalued and what needs to be done to improve returns. Once they win that support, the investor group can take those grievances public, essentially “forcing an event.”

Such activity will cause the markets to move—something the activist investor can take advantage of. “If you talk to an event-driven trader, they compare [their regular jobs] to picking up dimes in front of a steamroller: You’re picking up very small amounts, but if you misjudge, you’ll get crushed,” Herrington says. “An activist investor decides they’re going to force an event right away to reduce risk and lock in a short-term gain.”

“Once you have a good study in c-stores, one noteworthy target will attract other activists into the space.”

The payback can make the effort worthwhile. If reality TV star Kylie Jenner can cause Snapchat’s stock to drop 6% with a single nonchalant Tweet, knowledge of any market-moving event can put a trader on the right side of a considerable return.

In 2014, stock for Cary, N.C.-based The Pantry rose an astounding 127.6% during its run-in with investor activism that brought on its sale to Couche-Tard, according to a Raymond James study.

For CST Brands, its stock rose 32.8% from the initial activism in late 2015 to the chain’s announced sale to Couche-Tard in August of the following year.

In the case of Marathon, in which activist shareholder Elliott Management, New York, initiated an event with a letter to Marathon’s board in 2016, stock prices eventually rose 51.8%, according to the study. The twist in this case is that after about a year of self-examination, Marathon’s management decided not to sell Speedway. It seems that the “event” need not resolve in a sale for activist investors to achieve their goals.

“If the stock price did go up and the activism brings value, they may not stick around to bring change,” Herrington says. “They may just move on to the next target.”

C-stores and retail in general have become much more of a focus for activist investors in the past few years, Herrington says. More commonly, the targets were companies in the tech and financial sectors. However, consolidation, oversaturation and disruption have drawn the focus to retail, he says, including restaurants, specialty shops and chain stores of all types.

“Once you have a good study in c-stores, one noteworthy target will attract other activists into the space,” Herrington says. “It’s a good indicator.”

Raymond James has been tracking the most recent activism occurring with Ankeny, Iowa-based Casey’s General Stores (pictured), which began in January of this year. Its stock has gone up and down in recent months, with analysts saying that the event has yet to resolve.

To placate investors, Casey’s officials took several steps, including board changes, incorporating consumer-facing and price-optimization technology, governance changes and even a reported (unsuccessful) bid for the c-store assets of Cincinnati-based Kroger—a 784-store pinata—which ultimately went to Blackburn, U.K.-based EG Group.

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