NEW YORK -- Activist investors have had considerable success affecting stock prices and influencing major strategic actions in the U.S. convenience-store industry, according to a review of recent shareholder activism conducted by Raymond James & Associates Inc.’s Activism Response & Contested Situations (ARCS) practice.
And Raymond James expects more such shareholder group actions to come.
The New York-based firm offered case studies of activist investor efforts in the c-store space involving major c-store chains such as The Pantry Inc., Cary, N.C.; CST Brands Inc., San Antonio; Marathon Petroleum Corp., Enon, Ohio; and Casey’s General Stores Inc., Ankeny, Iowa.
Here are details from Raymond James’ case studies …
Cause: In January 2014, The Pantry Inc., a chain of about 1,200 Kangaroo Express c-stores in the Southeast, announced that it received notice from two activist investors nominating three candidates to the company’s board of directors.
The activist investors argued that The Pantry was deeply undervalued as a result of poor investment and operational decisions and that the current board had presided over prolonged underperformance.
Cause: In December 2015, Engine Capital delivered a letter to the board of CST Brands Inc., a chain of about 1,900 c-stores in Texas, New York and Canada, expressing concern over the company's stock price performance since its spinoff from Valero Energy Corp.
JCP Investment Management submitted a separate letter citing plans to nominate new directors due to lack of progress on operational initiatives.
Effect: CST Brands reached an agreement with the activist investors and announced plans to evaluate strategic alternatives due to the perceived disconnect between CST’s intrinsic value and CST’s share price, Raymond James said.
In August 2016, CST announced an agreement for Couche-Tard to acquire CST for $4.4 billion.
Marathon Petroleum Corp.
Cause: In November 2016, corporate investor Elliott Management sent a letter to Marathon Petroleum Corp. recommending it take specific actions to add $14 billion to $19 billion of value for shareholders. Elliott recommended that Marathon Petroleum immediately drop down all master limited partnership (MLP)-qualifying income to MPLX, the company’s midstream energy infrastructure MLP subsidiary. Additionally, Elliott suggested conducting a full strategic review, giving careful consideration to a potential spinoff of Speedway, the company’s approximately 2,750-unit c-store segment.
Effect: Marathon initially signaled disagreement with Elliott’s plan, but later announced steps to pursue value-creating actions, including substantial dropdowns to MPLX. It also conducted an independent review of Speedway, deciding against a sale or spinoff. Elliott eventually voiced its support for the decision to retain Speedway.
Casey’s General Stores
Cause: In January, JCP Investment Management, BLR Partners and Joshua Schechter issued an open letter to Casey’s General Stores shareholders suggesting the public c-store chain is significantly undervalued and urging the board to engage a financial adviser to explore all strategic alternatives, including a potential sale. According to the letter, Casey’s earnings guidance misses and decelerating same-store sales growth have hampered share price performance in recent quarters.
Effect:Casey’s issued a statement on the same day it received the letter indicating that management was surprised by the letter, but would review the contents thoroughly. The company has since outlined a strategy to increase profitability and enhance performance and has appointed three new independent directors and named independent director H. Lynn Horak the new chairman of the board.
Based on the case studies, Raymond James offered these takeaways on investor activism in the c-store industry:
- Within the c-store industry, activist investors, and particularly JCP Investment Management, have registered notable success generating stock price returns and influencing major strategic actions.
- Roughly one-half of activist campaigns result in a significant corporate event within three years of launch and of those cases, roughly half of the corporate events occurred within one year.
- Over the prior three campaigns in the industry, target companies were ultimately sold in two instances (CST Brands and The Pantry) and in the third, Marathon Petroleum undertook efforts to accelerate certain strategic initiatives; along the way, average non-annualized returns to shareholders over the course of the activist campaigns exceeded 30%.
- Given the historical “success” (as defined by shareholder returns) of activists in the c-store industry, neither the size of the ownership position in the company (JCP acquired a 1.3% stake in CST Brands during its activist campaign) nor the size of its fund correlates well with the significance of the strategic actions the activist is able to influence. Likewise, size should not influence the extent to which a company targeted by activists takes the threat seriously.
- Historical success will encourage additional interest in agitating for change (for example, Casey’s current situation); shareholders will likely welcome activist involvement.
And the most important advice:
- Before becoming targets of activist campaigns, management teams should perform thorough examinations of their existing structural defenses (for example, a staggered board), assess potential vulnerabilities and proactively address weaknesses and have a response plan and team in place.
For more analysis, as well as timelines and company responses, click here to view the full Raymond James report.