In January, at a gathering of its U.S. store managers in San Antonio, CST Brands Inc. rolled out a statement of core values. The words were not original. In fact, some of the newest faces in the room likely already knew them by heart:
“Be nice, have fun, sell stuff and be the best.”
Those words, after all, belonged to the late John MacDougall, founder of Nice N Easy Grocery Shoppes, the Canastota, N.Y.-based c-store chain jointly acquired by CST and CrossAmerica Partners LP late last year. Adopting MacDougall’s mission was more than a kind gesture to the former Nice N Easy employees now on CST’s payroll. To CST chairman and CEO Kim Lubel, a key component of CST’s acquisition strategy is leveraging best practices so that taking over is more about “coming together.”
“That,” Lubel explained a few days after the meeting, “is really where we’re going to win on the acquisition front.”
Across the industry, winning on the acquisition front is getting harder and more expensive. Major chains such as 7-Eleven and Alimentation Couche-Tard; active buyers including Energy Transfer Partners (ETP), CST Brands and GPM Investments; and a host of regional operators are all expected to be in hot pursuit of an increasingly available but limited supply of quality c-store assets.
Consolidation in the industry is accelerating, fomented by a “perfect storm” of low interest rates, readily available capital and quality, family-owned operators and other retailers seizing the opportunity to sell.
“When something becomes available, you see everybody interested,” says Dennis Ruben, executive managing director of NRC Realty & Capital Advisors, Chicago.
It’s a good time to be a buyer, says Bill Walljasper, senior vice president and chief financial officer of Casey’s General Stores, one of a few publicly traded companies left in the channel. The Ankeny, Iowa-based operator of more than 1,800 stores is persistently on the hunt for new acquisitions.
“I wouldn’t necessarily say there is a frenzy going on, but certainly there is an appetite for M&A activity in the convenience-store space,” Walljasper says. “We’ve seen a number of larger deals happen in our industry over the last year or two. And I think you’ll continue to see rollup.”
Buying Power
The prospective-buyer lists that Ruben develops are longer than they used to be. One reason: Buyers are less constrained by geography.
“It used to be that Sunoco was more East Coast-based and CST was more in the South,” Ruben says. “Now CST went to New York and bought Nice N Easy, and Sunoco went to Texas (with Susser) and Hawaii (with Aloha Petroleum).” Even in the Midwest, companies such as Kum & Go and Casey’s are expanding beyond their historical core markets.
Buyers are drawn to quality assets in good markets, Ruben says. They seek sellers that boast strong inside sales and good gasoline products, and they often prefer fee properties over lease properties.
“Buyers tend to want to buy companies with fee real estate because they can finance it easier,” he says. “And people don’t want to get stuck with leases that may be expensive relative to the performance of the stores.”
Record-low interest rates could inch up in the months ahead, but the increases aren’t expected to be sudden or dramatic, according to Roger Woodman, managing director of Raymond James, St. Petersburg, Fla.
“It is a good time to be a buyer because there is so much capital available to fund growth,” he says. Senior bank debt is one source, but retailers also are finding alternatives such as mezzanine capital or non-bank lenders looking to invest through subordinated debt. (See sidebar at end of story.)
“There’s also a lot of interest in the space by the private-equity universe today,” Woodman says. “They like that this industry is so highly fragmented and did really well during the downturn.”
That said, it’s also an expensive time to be a buyer. Multiples have soared in the past 12 to 18 months. Small and midsize companies are finding it difficult to compete with larger players that have high liquidity and readily available credit, or with a highly active contingent of master limited partnerships (MLPs) and their tax advantages.
Even some larger players are starting to balk at the multiples paid by some MLPs. The $2.87 billion acquisition of Hess Corp.’s retail operations last year by Marathon Petroleum Corp.’s subsidiary, Speedway LLC, showed how far buyers were willing to go for superior assets, according to John C. Flippen Jr., managing director of Petroleum Capital and Real Estate LLC (PetroCapRE), Baltimore.
CONTINUED: Midsized Retailers: Buy or Sell?
Buy or Sell?
The buying battleground poses a quandary for modest-size operators with 25 to 100 stores that are eager to grow.
“The very large players typically have lines of credit they can tap, like the MLPs,” Ruben says. “Circle K and 7-Eleven obviously have huge access to capital. Regional players also have lines of credit and a lot of liquidity. Many others use sale-leaseback.”
That doesn’t mean you’re out if you’re midsize. Rather, you must play to your strengths. “We’ve always been about growth, and we’ve tried to grow both organically and through acquisitions,” says Lynn Wallis, president and CEO of Cuba, Mo.-based Wallis Cos. “With the MLPs and the rollup companies that we’re seeing in the market, it will be more difficult for us.”
Her company, which operates 34 On the Run stores and supplies another 170 locations with fuel, joined the bidding fray not long ago. Wallis declined to provide details but said the final price for this deal ended up being “a little bit more than what would be a conservative look.”
Still, in an industry with hundreds of small and midsize operators, many looking to sell, she remains optimistic. And indeed, rarely a week passes when one small player is not acquiring another—say, a three-store pickup or a five-store chain. Those deals are often forged among longtime rivals and friends.
But such deals are not what’s rocking the channel today—it’s the sale of landmark chains such as Nice N Easy or regional powerhouses Susser, Hess and The Pantry.
Wallis plans to focus future efforts on sellers that have company cultures similar to her own, ones that value employees and the investments they’ve made in building their businesses. She believes a family-operated company such as hers has a lot to offer sellers “that maybe doesn’t translate into a multiple of EBITDA.”
“You have to work the relationship, do your due diligence, make sure this is something that would fit and work it from that end, rather than sit back and wait for someone to approach you,” she says.
CONTINUED: Expanding Casey's
Expanding Casey’s
You can approach Casey’s General Stores if you want them to acquire your business. There’s a link on the company’s website entitled “Submit an Acquisition Site.”
But Casey’s isn’t just waiting on sellers. Walljasper says the company has a team that scouts sites in mostly rural Midwest communities for new construction or acquisition, as well as a network of external realtors it retains across its 14-state business area.
Last year, Casey’s acquired the 24-store Stop-N-Go chain in Minnesota and North Dakota. By February 2016, Casey’s expects to complete construction of its new distribution center in Terre Haute, Ind., which will accommodate about 40% of its routes in its first year and open the potential for expanded delivery to new market areas.
This is indeed a game changer for the company. “We’ll be able to go further east into Tennessee and Kentucky, south into Arkansas, look into Michigan, eastern parts of Indiana, western parts of Ohio,” Walljasper says.
Because of its focus on small-town Midwest communities, Casey’s was largely buffered from the major MLP transactions of 2014. Regardless, Walljasper says he’s confident Casey’s can compete in today’s buying market.
“We feel that based on our financial capacity and our cost of capital structure that we’re in a very good position to be very competitive with anybody, whether it’s an MLP or not an MLP,” he says.
Buying Time
Five years ago, the MLP structure owned zero c-store assets. By the end of 2014, more than 10,000 c-store sites were under an MLP, says Woodman of Raymond James.
And the majority of those buyers appear to have a longer-term focus rather than a desire to buy and flip—a method more popular two decades ago. “Even the MLPs,” Woodman says, “are buying to grow their distributions for unit holders.”
In less than three months last year, CST Brands and CrossAmerica Partners announced three joint acquisitions, including that of Nice N Easy and 22 Landmark c-stores in San Antonio and Austin, Texas. CrossAmerica Partners came into being as the new name for Lehigh Gas Partners LP after the acquisition of the MLP’s general partner by CST Brands last fall. In December, CrossAmerica agreed to acquire Erickson Oil Products Inc. of Hudson, Wis., and its 64 Freedom Valu stores.
The relationship with CrossAmerica and access to the MLP structure, says Lubel, “has helped us tremendously in terms of accelerating our growth plans.”
But what attracts CST most are well-run, family-owned companies. “When we came together with CrossAmerica, one of our core goals was to be in an acquisitive mode, and we wanted to be really good at it,” Lubel says. “We understand these family-owned businesses in particular. They have a lot of pride in their employees. The families want to make sure the employees are well taken care of.”
To that end, CST employs a dedicated integration team that focuses on acquired companies and bringing them into the CST network. The team allows the operators to stay focused on ongoing business and helps CST to learn more about the companies it has acquired, according to Hal Adams, CST Brands’ chief marketing officer.
“It’s not just us integrating their stores into our network,” he says. “It’s taking their best ideas and putting them over the larger store network. It’s a two-way win.”
Adding the integration team “has really helped us step up our game on the acquisition front very quickly,” Lubel says, and it’s helping retained employees of the acquired companies “feel part of the bigger picture without feeling run over.”
For example, the employee who led Nice N Easy’s digital and social media efforts is now leading the charge for more than 1,000 stores.
“We’re not just buying the box,” Lubel says. “We’re buying the company.” Click here to read more about CST Brand's corporate culture.
CONTINUED: Where's the Money Coming From?
Where’s the Money Coming From?
Funding to back any acquisition has to come from somewhere. And with c-stores having a proven track record for producing in a down economy, more lenders have emerged. Todd Anderson of 1CapitalPartner runs down a list of financial resources for us.
Banks
Traditional bank financing or term financing. Loans are often 10 to 20 years, starting with a floating rate that’s swapped for a fixed rate. The acquired property secures the transaction. With wholesale fuel, the bank provides a line of credit based on the value of the contracts acquired.
Mezzanine/Equity Financing
Subordinated debt, preferred equity and equity providers.
Cash
Major acquirers have existing liquidity, access to public markets or bank facilities to draw on, essentially making them cash buyers.
Sale Leasebacks, REITs
Through the use of real estate investment trusts (REITs), buyers can execute sale-leaseback financing using the acquired land.
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