CSP Magazine

Everything Sold Is New Again

As MLPs take a back seat in 2017, store-centric mindsets retake M&A

Convenience retailers may remember 2017 as the year they took back the wheel—at least in terms of M&A. While oil companies and financially rewired rollups—mostly in the form of master limited partnerships (MLPs)—brokered mammoth transactions just two to three years ago, some of convenience retail’s biggest names locked down this year’s most notable deals.

“There were a half-dozen real big players before,” says Dennis Ruben, executive managing director of NRC Realty & Capital Advisors LLC, Chicago. “Now 7-Eleven and Couche-Tard are the two big dogs on the block.”

Of course, Ruben is referring to Irving, Texas-based 7-Eleven’s purchase of 1,100 Sunoco stores earlier this year and Laval, Quebec-based Alimentation Couche-Tard’s claim to the 522-site, Bloomington, Minn.-based Holiday Stationstores in July.

What follows is an in-depth review of the year’s most high-profile deals—and in some cases, deals that never happened—from the vantage point of CSP’s newly updated ranking of the top 40 c-store chains.

Table of Contents

2017 in Review

7-Eleven: 20k By 2027

Circle K Takes a Holiday

KT Plucks Low-Hanging Fruit

Chevron Tries a New Tack

Marathon: Speed Up or Slow Down?

Andeavor and Ever

Yesway to the Rest

Ranking the Top 40 C-Store Chains Now

2017 in Review

MLPs, oil companies and private-equity firms were busy in 2017. The refining, marketing and retail assets of Tesoro and Western Refining re-emerged as San Antonio-based Andeavor. Delek U.S., Brentwood, Tenn., sold its Mapco portfolio in 2016, only to turn around and buy Dallas-based Alon USA, the largest U.S. 7-Eleven licensee. Meanwhile, 7-Eleven’s $3.3 billion deal for Philadelphia-based Sunoco and the shakeout following the Couche-Tard purchase of San Antonio-based CST Brands’ 1,300 locations in 2016 created a free fall of noncore assets for multiple roll-up entities.

But the true nature of the 2017 acquisition scene centered on foodservice, friendly employees and solid operational execution—all core fundamentals of convenience.

Take La Crosse, Wis.-based Kwik Trip. A key motive behind buying PDQ Food Stores, Middleton, Wis., and its 34 locations in July was culture. “One of the advantages for Kwik Trip is that PDQ has a strong, long-standing tradition of great guest service,” says John McHugh, Kwik Trip’s head of corporate communications and leadership development. “This acquisition is a good fi t culturally.”

Even Omaha, Neb.-based Berkshire Hathaway’s recent 38.6% equity-stake investment in Knoxville, Tenn.-based Pilot Flying J has a retailer bent, with the Haslam family retaining majority ownership through 2023.

The big no-shows of 2017 were the MLPs. Hinds Howard, portfolio manager of MLP strategies for CBRE Clarion Securities, Radnor, Pa., says Sunoco, itself an MLP, relinquished its consolidator status when it sold to 7-Eleven. Howard believes the decision signaled an overall slowing by what he more specifically defines as “fringe” MLPs.

Part of the issue: Investors judged fringe MLPs using the same criteria as regular, mid- and upstream MLPs, which have been hobbled by falling oil prices. A traditional MLP involves energy transportation, storage and processing assets, which has an altogether different scale and investment dynamic, Howard says. C-store MLPs were also hit by falling gas prices and limited access to capital.

“As a business, c-stores seem solid, but not in the MLP wrapper,” Howard says. “C-store MLPs in general held up better operationally. It’s just that the business model had to access capital markets to grow, but share prices went down so much and they became leveraged higher than they should have been.” Those

factors combined to “overwhelm” what should have been a positive financial outlook for gasoline and c-store MLPs, he says.

Included in the no-shows were other savvy retailers that decided not to play: Murphy USA Inc., El Dorado, Ark., which at more than 1,400 stores spent the past few years razing and rebuilding to make its network more competitive; and Marathon Petroleum Corp., Enon, Ohio, which used 2017 to decide whether to spin off 2,730-store Speedway.

Still, despite the inactivity, Ken Shriber, managing director of Petroleum Equity Group, Chappaqua, N.Y., sees movement with stores in “smaller, regional markets with five to 40 operating sites. Multiples for good assets remain at strong levels, and I see this class of assets continuing to trade,” he says.

Generally, cost savings from overhead cuts and contract renegotiations will continue to inspire M&A activity going into 2018, says Jeff Kramer, managing director of NRC. “The basic fundamentals for consolidation are still there; it’s just not going to be frenzied like it was,” he says.

Next: 7-Eleven: 20k By 2027

7-Eleven: 20k By 2027

Following slow c-store sales growth in Japan, 7-Eleven’s Tokyo-based parent Seven & i turned outward and instituted an unmistakable modus operandi: “an unrivaled lead in domestic and overseas convenience-store operations by accelerating acquisitions,” the company said in a recent presentation.

“We like the U.S. market,” says Joe DePinto, president and CEO of 7-Eleven, who sits on the Seven & i board [CSP—June ’17]. “We think that there’s room for expansion here.”

The company’s short-term goal was to get to 10,000 U.S. stores by 2019. By 2027, DePinto says, the  company hopes to hit 20,000.

7-Eleven’s U.S. store count now sits at 8,900 locations, according to the company. When it closes this year, 7-Eleven’s more than $3.3 billion acquisition of 1,100 company-operated c-stores in Texas, New York, Florida and other states from Sunoco LP will bring it across that initial 10,000-store finish line.

The deal is the company’s largest acquisition ever, taking advantage of Sunoco’s shift in focus to wholesale fuel and the oil company’s highly leveraged position on the retail side. “7-Eleven, with this acquisition, becomes a much bigger player in the branded-fuels marketing arena, while at the same time, [it] adds to their backcourt footprint in markets where they lack penetration,” says Shriber of Petroleum Equity Group.

The deal also took out a competitor in Texas, Ruben of NRC says: “But it also gave them an expanded footprint on the East Coast—in the Northeast, where Sunoco has historically been very strong.”

In Texas, the deal includes the Stripes c-store and Laredo Taco Company foodservice brands that Sunoco gained from its $1.9 billion purchase of Susser Holdings Corp., Corpus Christi, Texas, in 2015.

Foodservice has been a focus for 7-Eleven. Its parent company in Japan executes multiple daypart meals; in the United States, the chain has evolved foodservice in fits and starts. With an additional imperative from Japan to enhance its foodservice profile, 7-Eleven inherits Sunoco’s need and determination to discover whether iconic Mexican cuisine concept Laredo Taco Company has legs beyond its current market.

Next: Circle K Takes a Holiday

Circle K Takes a Holiday

The acquisition of Holiday Stationstores added two plum assets to the Circle K portfolio: a platform blowout spanning 10 states, six of which were new to the network, and a vibrant foodservice ecosystem.

While keeping mum on the purchase price of Holiday, Brian Hannasch, president and CEO of Alimentation Couche-Tard, spoke on a recent investor call of the company’s unique value. “More than any company that we have acquired so far,” the 522-store network offers Couche-Tard and its Circle K c-stores what he called “reverse synergies.” In other words, a chance for the buyer to learn just as much as it could teach.

“[Holiday does] a lot of things very, very well in their markets,” Hannasch told investors on the Sept. 6 call, pointing to its commissary, operating processes and marketing strategies.

As consolidators with true convenience lineages go, Circle K stands with 7-Eleven as the only two with both the backing and the hunger to gobble up whole swaths of a fragmented channel. In the case of Holiday, Couche-Tard used available cash and existing credit facilities to secure the deal. In terms of earnings, Holiday is expected to generate $180 million to $190 million on an annual basis before traditional synergies, Couche-Tard officials said.

Regarding those synergies, which typically come from cutting redundant jobs, renegotiating vendor contracts and maximizing existing assets, Hannasch described the Holiday case as “in line with what was experienced in past acquisitions.”

For its acquisition of 1,300-store CST Brands, which closed in July, Hannasch reported $47 million banked through synergies so far and $150 million to $200 million targeted over three years.

But beyond achieving synergies, Couche-Tard’s sensibilities as a c-store-centric operator keep store profitability and viability squarely in the forefront of any new deal. As an example, some of its most  recent acquisitions—such as CST and its assets of Canastota, N.Y.-based Nice N Easy—relate to Couche-Tard’s interest in elevating its foodservice program.

On that recent investor call, Hannasch dissected its new trove of foodservice intellectual property. He described CST’s made-on-site program as similar to Couche-Tard’s made-to-go. CST has a bakery program in about 800 locations that’s also similar to a program Couche-Tard runs. Nice N Easy has what Hannasch called a “very developed” program, including sandwiches and pizzas. With Holiday, he spoke of a sophisticated foodservice culture.

“Our first step … [is to] optimize all three levels of [our] offer,” Hannasch said, “being the full made-on-site, that medium offer of bakery and very limited number of SKUs, and then more of a … commissary-delivered approach.”

For Holiday, Hannasch envisioned a “different cadence,” saying, “We’d be very, very careful at making sure that we don’t jeopardize capturing some of the reverse synergies and the great talent that we found in that company.”

The strategy appears to be more than just lip service. Irene Nattel, an analyst with RBC Dominion Securities Inc., Toronto, said in a recent research note that Couche-Tard’s fresh-food and coffee initiatives are helping to “generate traffic and grow market basket,” while at the same time, “its sharing of best practices among its many business units drive sales and optimize both margins and productivity.”

Next: KT Plucks Low-Hanging Fruit

KT Plucks Low-Hanging Fruit

Banana trees everywhere were shaking in their roots as Kwik Trip, the venerable banana and fresh-food king of Midwest convenience retailing, exercised its internal buying power in snagging PDQ Food Stores in July.

Known more for its new-build strategy than channel consolidation, the La Crosse, Wis.-based retailer surprised the industry in its move to acquire the 34-store chain for an undisclosed price. (Its last reported acquisition of similar size was a 54-store purchase in 1988.) But as the dust settled, the deal’s fundamentals revealed a solid match.

Ranked No. 174 in CSP’s list of Top 202 c-store chains [CSP—Jan. ’17], PDQ had stores of comparable size and offerings, in addition to the intangible ingredient of culture. The acquisition also gives Kwik Trip a stronger foothold in the urban markets of Milwaukee and Madison, Wis., among others. “Certain municipalities have tight restrictions on building new convenience stores,” McHugh of Kwik Trip says. “Sometimes the best way to enter those markets is through an acquisition.”

Kwik Trip isn’t the only strong regional operator not afraid to play the acquisition card. As a public company, Casey’s General Stores, Ankeny, Iowa, has raised the stakes when it comes to expansion, having opened a new distribution center in Terre Haute, Ind., last year. The new facility will allow for both new builds and acquisition, with a “mileage reach” spanning a 500-mile radius.

However, Casey’s wasn’t invited to the table for the Holiday and PDQ deals, according to Bill Walljasper, senior vice president and CFO for Casey’s. (He declined to elaborate.) “We have every bit of appetite to do a large acquisition as opposed to a small one,” he says. “We would even look on the fringe of our marketing areas, if it makes sense.”

As far as Casey’s reputation for being a careful acquirer, Walljasper says each deal the company makes comes down to its return on investment: “We’ve paid well outside [conservative, 6x-8x] multiples if the asset warranted it.”

As for Kwik Trip, its PDQ acquisition sends a message about its intentions. “One of the benefits of an acquisition is the excitement it creates among current co-workers,” McHugh says. “People like to be part of a company that’s growing.”

Next: Chevron Tries a New Tack

Chevron Tries a New Tack

Expansion doesn’t necessarily mean acquisition. In the case of Chevron Corp., a committed convenience retailer as major oil companies go, expansion means a joint venture with Meridian, Idaho-based Jackson Oil Co., which will bring 60 of its approximately 230 Jacksons Food Stores under Chevron’s ExtraMile banner.

At 766 ExtraMile locations, the San Ramon, Calif.-based Chevron plans to double its network over the next 10 years, saying that Jackson Oil “allows us to quickly scale up and leverage new capabilities … [to provide] cost efficiencies, marketing and buying power,” according to Lorne Chambers, Chevron’s general manager for retail west.

While most major oil companies divested their retail assets throughout the 2000s, Chevron and Houston-based BP (with its ampm c-stores) stand as holdouts. Chevron appears to be excelling with its retail program, winning high marks for operational efficiency in the past from the annual CSP/Intouch Insight Mystery Shop, and developing a loyalty program that sets a new bar for the industry’s data-centric capabilities.

The deal creates a new company, ExtraMile Convenience Stores LLC, which Chevron and Jackson Oil will co-own. A first of its kind for Chevron, that new company will negotiate additional deals to extend the brand into the combined footprint of both chains.

Chevron has stores in California, Hawaii, Oregon and Washington. While Jackson Oil also operates in Oregon and Washington, its c-store platform adds Arizona, Idaho, Nevada and Utah to the footprint.

“Leveraging the breadth and expertise of Jacksons’ c-store operations will better position [ExtraMile] to grow and adapt to the changing marketplace at a faster pace than Chevron can on its own,” Chambers says.

Chambers envisions the new company to be “quicker, nimbler and better positioned” than Chevron by itself, thinking and reacting as a true convenience retailer. Chevron will then focus on increasing and expanding fuel sales.

On the Jackson Oil side, John Jackson, its CEO and president, says, “We are looking forward to combining the entrepreneurial spirit of the franchisees with the ExtraMile brand.”

Next: Marathon: Speed Up or Slow Down?

Marathon: Speed Up or Slow Down?

Amid the many deals driving the c-store industry’s M&A engine and reshaping the convenience landscape, one major company stands out for its decision not to put its sites on the block.

At the prompting of activist investors, Marathon Petroleum Corp. (MPC), Findlay, Ohio, conducted a strategic review of the company’s more than 2,700-unit Speedway LLC c-store chain. The investors believed MPC was undervalued and that the best way to unlock that value was to spin off or otherwise separate the retail network from the refining, marketing and transportation business.

After wrapping up the nine-month “rigorous and independent” review process, MPC in September came to a decision: Keeping Speedway as an integrated business “drives the greatest long-term value for shareholders.”

The decision not only kept MPC in the retail game, but it also took a major chunk of retail assets out of contention for acquisition by the likes of Couche-Tard, which was pegged as a major candidate to pick up Speedway.

Gary Heminger, chairman and CEO of MPC, said MPC is keeping Speedway so it will not lose estimated annual integration synergies of $270 million to $390 million.

In a conference call regarding the decision, Heminger also said that Speedway’s “performance is transparent and easy to understand, and is valued by the market.” Its growth potential, he said, is “not impeded by remaining part of MPC.”

“Marathon has not had sufficient time to monetize its acquisition of Hess Retail, and a key driver for that was an additional network for its refining output,” Shriber of Petroleum Equity says of that 2014 deal. “The integration of refining and marketing in this case provides the incremental return for Marathon, which supported their 14x multiple of EBITDA purchase of Hess.”

Next: Andeavor and Ever

Andeavor and Ever

Proving that “everything old is new again,” one of the newest retailers on the scene is an old player that has retained its oil-company roots.

The integrated marketing, logistics and refining company formerly known as Tesoro Corp.—and as Western Refining and Northern Tier Energy and SuperAmerica—is now Andeavor. But it’s more than just a new name.

San Antonio-based Tesoro’s $6.4 billion acquisition of El Paso, Texas-based Western Refining Inc. in June 2017 has created a geographically diversified refining, marketing and logistics company. It added Western’s refineries in Texas, New Mexico and Minnesota to Tesoro’s refineries in California, Washington, Alaska, Utah and North Dakota. The combined retail operations include more than 3,000 gas stations and c-stores operating under 12 brands in 18 states.

Andeavor’s retail strategy fits with its refining strategy, Kramer of NRC says. “The refining margins are outstanding on the West Coast, particularly in California,” he says. “By buying Western, it was a good fit to expand further into the country. I think they want to take the same approach of integrating retail.

“I wouldn’t be at all surprised if they continued to add to retail if it fits with their economics on their refining and distribution system and integrate it, a little like what Marathon has been doing out East,” Kramer says.

Among announced improvements, the SuperAmerica brand is getting a refresh, the details of which are still under wraps.

Meanwhile, in August, Andeavor acquired 39 retail outlets from Flyers Energy, Auburn, Calif., a third-generation family-owned business operated by the Dwelle family. The deal signals that Andeavor still has more changes to come.

Next: Yesway to the Rest

Yesway to the Rest

Not all M&A players are longtime c-store stalwarts with a mighty heft to throw around. But despite its short history, Yesway has ambitious goals.

When the company burst onto the c-store scene in mid-2015 with a couple of deals that included 21 stores it purchased from fellow Hawkeye State retailer Kum & Go, Yesway executives declared they planned to accumulate more than 1,000 U.S. convenience stores “over the next several years” and become a “national presence.”

So far, the West Des Moines, Iowa-based company has amassed a portfolio of more than 80 locations in Iowa, Kansas, Oklahoma and Texas, and it essentially doubled its store count with the acquisition of 35 Wes-T-Go and Chillerz stores in Abilene, Texas, in May 2017.

Zero to 80 in two years is notable, but it’s still a long way from 1,000. The company now has restated its target, looking to amass 450 to 600 stores within two years, according to Joe Petrowski, senior adviser and director of fuels for Yesway.

“Our goals are on track in regard to size, profitability staffing and performance,” he says. Petrowski says the company is looking for sites “where we can acquire at a reasonable multiple and would generate significant lift by the application of incremental capital and the corporate services we wrap around the stores,” including fuel procurement, loyalty programs and scale economics.

Yesway “seems to have some success on smaller deals that they could negotiate without a competitive process,” says Ruben of NRC. “It’s harder to do that, which is probably why they’ve cut back on their ambitious goals.”

Next: Ranking the Top 40 C-Store Chains Now

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