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The Pantry waiting "with bated breath" to get back into M&A game

SANFORD, N.C. -- Three months after swearing off acquisitions for the remainder of the year—and five months before the self-imposed ban will be lifted—executives at The Pantry are chomping at the bit to get back into the M&A game. "We are awaiting with bated breath to see how the lousy gasoline environment is going to affect multiples going forward," chairman and CEO Peter Sodini said during a recent conference call with stock analysts.

In early May, after reporting an underwhelming second quarter of its fiscal 2008, The Pantry announced it would cease gasoline hedging [image-nocss] and curtail spending, cutting capital expenditures by $20 million and putting a stop to store acquisitions, the very strategy that has epitomized the chain over the past decade.

But with analysts and shareholders anxious to see The Pantry get back on a growth track, the question frequently arises: What can we expect in 2009?

"We're following the market. We're plugged into a lot of the sellers' brokers," said Sodini last week. "We expect [cost multiples] to be down. Then we'll look at [the market] on a very conservative economic basis."

In the meantime, The Pantry has been focusing on its store operations and keeping costs down.

"Our immediate goal is to maximize the company's cash flow during the peak summer season and improve our overall performance before taking another serious look at growth opportunities," Sodini said. "We do, however, continue to believe there will come a time when it makes sense to begin growing and looking at strategic acquisitions once again. That is largely a function of how cost multiples go. And we also firmly believe The Pantry is well positioned for growth over the long term.

"We remain optimistic about the convenience-store sector, which has steadily gained market share at the expense of other retailing formats in recent years. Convenience continues to fill a critical niche in the customer 's life. The c-store market, particularly in the Southeast, remains extremely fragmented with over half the stores in all our key states operated by single-store operators. Thus the market is ripe for further consolidation."

Steve Ferreira, senior vice president of business development, noted other industry activity that may add up to growth opportunities for The Pantry, as well. "It has been announced by a number of oil companies that are divesting assets," he said. "So we 're on everyone's mailing list. We look at everything that comes by, and we're just going to be very cautious."

In fiscal 2008, The Pantry purchased only 20 stores, about one-sixth the number purchased in the previous year. But Sodini said he believes the respite from acquisitions has been good for the chain.

"I think we're accomplishing some of the things we wanted to accomplish by taking this pass [on acquisitions], focusing on internal operations, reviewing some of the ways we go to market," he said. "And I think it's reasonable to assume that at a point in time, we're going to resume seriously looking at [stores that] we expect to be priced comparatively cheaper."

Based in Sanford, N.C., The Pantry is one of the largest independently operated c-store chains in the country, with revenues for fiscal 2007 of approximately $6.9 billion. As of July 24, 2008, the company operated 1,659 stores in 11 states under select banners, including Kangaroo Express, its primary operating banner.

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