In the wake of a deal announced in August for CST Brands to acquire Lehigh Gas GP LLC, the industry has another case study on the ability of the master limited partnership (MLP) structure to supercharge growth.
Following this spring’s Susser Holdings Corp.-Energy Transfer Partners (ETP) deal, CST Brands has arranged to buy 100% of the membership interests of Allentown, Pa.-based Lehigh Gas GP, the general partner (GP) of Lehigh Gas Partners LP (LGP), from Lehigh Gas Corp. It is also acquiring all of the outstanding incentive distribution rights (IDRs), the units that make up ownership, of LGP.
The acquisition, slated to close in fourth-quarter 2014, catapults San Antonio-based CST Brands from a regional giant to a national colossus, expanding its operational footprint from the Southwest to the East Coast. Annual fuel volume would hit 3.9 billion gallons, while annual revenues would grow to $16.3 billion.
“We’re doubling our sites in the U.S. alone,” said Kim Bowers, CST chairwoman and CEO, referring to fueling locations during a call with analysts. “It also shows you how complementary our geography is. Really building up the presence on the East Coast will allow us to do new store growth in this direction and look for acquisitions in this area, as well as bring the wholesale business out West to marry up with our operations in that direction.”
The price—$17 million in cash and approximately 2.044 million shares of CST common stock—totals about $85 mil - lion. At first glance, this seems a low sum for such a big deal, considering that CST operates 1,900 sites in nine Southwestern states and six Canadian provinces, while LGP distributes to roughly 1,100 stores on the East Coast, owning or leasing more than 625 of them. However, it reflects the unique structure of the acquisition.
By acquiring only the GP and the IDRs, CST did not pay for an equity stake in LGP; LGP will operate as a separate, publicly traded MLP, with no change in ownership of its common units. CST will manage and operate all c-stores, while LGP will manage all U.S. wholesale fuel operations and the dealer network.
However, CST is gaining control and immediate access to the MLP structure to fuel future growth while finding a new home for its extremely valuable assets, such as its new-to-industry properties and very large retail fuel distribution.
As these assets are sold to the MLP, CST will receive cash and a growing interest in LGP’s limited partner units. And as LGP grows, so will CST’s IDR and unit distribution payments.
Obtaining this capital structure, while also acquiring a company with the track record of LGP, makes this deal not only big, but it also positions CST to become a national player like Circle K or 7-Eleven.
MLP analyst Hinds Howard told CSP in an e-mail that the deal gives CST immediate access to MLP advantages even though it hasn’t actually formed one. “CST gets an MLP vehicle with IDRs without having to go through a registration process, and gets additional locations,” he said.
In a research note, Bonnie Herzog, senior analyst for Wells Fargo Securities LLC, New York, said the deal “jump-starts CST’s foray into a stronger/more efficient capital structure with access to an attractive cash-flow stream.” She expects it to accelerate CST’s growth, and she believes it will encourage other industry players to consider the MLP route to growth.
“Given the potential value created in this deal for both the MLP and CST, as well as ETP’s recent deal with [Susser], we believe there are more of these types of deals to come,” she said. It also should speed up industry consolidation as more companies appreciate the value-generating capabilities of such transactions, she said.
While the move aims to give CST a tax-friendly path to acquire cash and speed growth, there are considerable advantages for LGP as well. While CEO Joe Topper pursued an MLP strategy for LGP that helped grow the fuel wholesaler in a series of modest acquisitions, it was not big enough to truly compete with the biggest MLPs for larger acquisitions. In fact, it lost out to ETP on bids for MACS and Tigermarket over the past year.
As Howard points out, by selling to CST, LGP raises its growth profile “by virtue of increased visibility into acquisitions (from CST) over time.”
In an exclusive interview with CSP, CST treasurer Jeremy Bergeron said the deal taps the strengths of both companies. “Lehigh has a lot of successful experience in wholesale fuel marketing and CST has a track record of great retail experience,” said Bergeron. “With this deal, we combine those two aspects and get a favorable capital structure that gives us a lot of flexibility. It allows us to be selective on deals. It can be a pure wholesale play, it can be a pure retail play or it can be both. We can really pursue any kind of deal in just about any location.”
CONTINUED: CST-Lehigh Main Takeaways
CST-Lehigh Main Takeaways
▶ Consolidation ramps up: With CST to be on a comparable footing with ETP, the industry could witness an M&A frenzy that hearkens back to the late 1990s when many firms went on acquisition sprees. However, today’s MLPs should be on better financial footing than many of those players, who became overleveraged.
▶ MLPs take the lead: As MLPs get in the M&A driver’s seat, traditionally structured giants such as 7-Eleven and Alimentation Couche-Tard could increasingly be at a competitive disadvantage, from a tax perspective and the ability to pay higher multiples for large acquisitions.
▶CST’s fuel brand portfolio explodes: CST is only two years into its 15-year supply agreement with Valero and is committed to the brand for 10 years for its existing stores, followed by a 20% optional yearly decline in supply until the commitment expires in 2028. For acquisitions or new construction, however, CST can brand however it chooses. Combined with Lehigh, CST has access to 11 fuel brands, including major oil flags such as BP, Exxon and Mobil; the deal also opens up the East Coast for expansion.
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