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Next Merger Wave?

Heavyweights at Morgan Keegan conference predict heavy consolidation in 2011-12
ATLANTA -- Could an infusion of equity funds and a reawakening of some slumbering consolidators be in the offing for the convenience channel?

Could this fragmented segment, whose ranks are swelled by legions of small independent operators, be bracing for a new wave of mergers and acquisitions beyond the recent divestitures from major oil?

The chimes of agreement by three major retailers, whose current portfolios were largely propped by an aggressive roll-up strategy, suggests 2011 could yield a number of deals.

"We're really on the cusp of a really big consolidation [image-nocss] in the coming years," said Sam Susser, operator of the 525-unit Susser Holdings Corp., a Corpus Christi, Texas-based company that is expected to generate more than $3.9 billion in revenues for 2010.

Survivors will be the glut of smaller operators and independents, and drivers will be the companies possessing liquidity and liberal equity terms. "In the middle," Susser however noted, "I think there's going to be tremendous consolidation."

Susser's largest acquisition came in 2007 when it purchased the 168-store Town & Country Food Stores in an all cash transaction. The company last fall followed with a more modest pickup of 25 Quick Stuff units from Jack in the Box.

Susser's outlook came Tuesday at Morgan Keegan & Co's Convenience Store and Distributor Conference. In addition to Susser, other presenters included Christopher Murray, senior vice president of South San Francisco, Calif.-based Core-Mark Holding Co. Inc., the c-store channel's second largest distributor; Terry Marks, president and CEO of Cary, N.C.-based The Pantry Inc.; and Mark Cox, CFO and executive vice president of Brentwood, Tenn.-based Delek U.S. Holdings Inc.

While Marks centered his comments mostly on The Pantry's multi-million dollar store reimaging and merchandising campaign (click here for previous CSP Daily News coverage), he also noted the recent pickup of 47 Presto Convenience Stores in Kansas and Missouri.

"That kind of scale is something we like to do," Marks said. The deal represented the company's first outside of the Southeast, where it operates more than 1,600 stores. That geographic departure was not lost on the audience or Marks, who spoke about the Southeast's desirable growth as both a company strength but a potential vulnerability as other well- financed retailers, including Walgreens and large dollar store chains, buy up coveted lots.

Thus, of Kansas, he said, "It's the beginning of building a more balanced geographic portfolio."

Marks has said before that The Pantry will be a "net acquirer." (Click here for previous coverage.)

Indeed, other retailers both at the Morgan Keegan conference and at the NACS Show told CSP Daily News that they were eyeing acquisitions that could close as soon as the fourth quarter of 2010 or first quarter of next year. "We're in negotiations on two deals that we hope could close pretty soon," one operator said from the show floor on condition of anonymity. And yet another operator based in the Midwest said he too was aggressively eyeballing potential acquisitions of small chains in his core markets.

One company that has gradually upgraded its convenience offering talked at the Morgan Keegan conference about returning to a stronger financial position. MAPCO Express, with 425 stores, has seen its stock shares trade at a lower multiple than Susser's or The Pantry, but after pouring more than $150 million in 2009 and another $50 million this year to upgrade its lone refinery in Tyler, Texas, the operator is primed to redirect funds next year in its c-store portfolio.

The largest expenditure will come in further reimaging its retail network, with expectations to revitalize some 100 stores by 2012. Indeed, MAPCO's Cox compared a three-month performance between 70 reimaged stores and the remaining legacy units. The result showed significantly higher sales both at the forecourt and inside the store at the reimaged sites, where MAPCO has been upgrading its fresh foodservice offering and expanding a private-label line.

"It's a much better margin for us and we're trying to develop loyalty to us," Cox said of the private-label products that include water, tea, energy and fruit drinks. The company also has seen some success with its stable of quick-service restaurants (QSRs), including Quiznos, Krispy Krunchy, Subway and Blimpie's.

Considering the company's recent history as a consolidator, Cox noted MAPCO continues to troll for sites in such core markets as Nashville and Memphis; however, underscoring the company's preference for units in the 4,000- to 5,000-square-foot range, he added, "the real challenge we see on the acquisition front is a lot of stores on the market are smaller stores."

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