When Hess Corp. filed for a tax-free spinoff of its retail business in January, could deal makers ever have imagined that the convenience store brand as they knew it would completely cease to exist in just three short years?
The iconic bold green-and-white logo will soon make way for another icon, albeit a Midwestern one: Speedway’s red-and-white logo.
In a move that gives Marathon Petroleum Corp.’s Speedway LLC ownership of all Hess retail locations, transport operations and shipper history on various pipelines for a total consideration of $2.87 billion, the acquisition announced at the end of May represents a strategic move by Speedway to push beyond its Midwest roots.
“This acquisition will be transformative for MPC and Speedway as it will significantly expand our retail presence from nine to 23 states through these premier Hess locations throughout the East Coast and Southeast,” says MPC president and CEO Gary Heminger.
Today, Hess is a global integrated energy company and a leading convenience store retailer on the East Coast. But in March 2013, the company announced that it would divest its retail operations and focus on exploration and production. It never took the retail arm off the sale block, not even in January, when it officially filed to spin off the retailing network.
Enter Speedway. Back in 2013, Heminger commented confidently on Hess’ retail assets. “They have one of the best-looking systems on the East Coast,” he said during an October 2013 conference call. “It would be an excellent fit with Speedway.”
Following the acquisition, Heminger also was effusive. “This [acquisition] really fits us like a glove and is going to tee us up for long-term growth,” he said on a conference call about the deal.
Tony Kenney, president of Speedway, says that the deal will make the retailer the largest company-owned and -operated c-store chain in the country based on revenue, and the second largest by store count.
Bye to a Brand
The acquisition will no doubt be an adjustment for the many loyal Hess customers up and down the Eastern Seaboard. The brand enjoys sustained popularity on social media, with almost 378,000 friends on Facebook alone. It’s also proven itself a hub for the on-the-go eater. Following the sale, concern over the fate of Hess’ collectible toy trucks that roll out anew each Christmas sparked the need for a completely separate press release affirming that the toy truck for 2014 will indeed be sold this holiday season.
But despite all that goodwill, all Hess retail locations will be completely rebranded within three years. Speedway’s leadership structure will remain in place, and Speedway’s headquarters will stay in Enon, Ohio.
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“One of the things we’ll do is look at best practices between the two [companies],” says Angelia Graves, public and state government affairs for MPC. “Some of the things that we look at already from the Speedway side is our merchandise sales focus. We’re very much focusing on customers, and the service we’re providing for customers. We’ll be taking that across the entire platform. And Hess has been a leader in fuel sales in their market. That’s a very positive thing that we’ll want to continue to develop and expand upon.”
All aspects of the convenience store, from the fuel canopy to inside, from the loyalty program to charitable giving, will be Speedway. On the fuel side, MPC has seven refineries throughout the country. According to Graves, Speedway will be able to place a lot of MPC’s product into these new locations.
“That’s where we start to capture our synergies,” she says. “Economies of scale, fuel to the market, customers through our Speedy Rewards program: We will leverage all of those existing practices and assets that we have.
“I think it’s going to be a good transition for both Speedway and Hess,” Graves continues. “They’ll both change to become one.”
Sweet Sale?
When Hess Corp. filed the paperwork for the spinoff of its convenience retailing arm in January, the deal would have distributed all shares in newly formed Hess Retail Corp. to holders of Hess Corp. Despite the fact that the company continued to look for buyers, the news that Marathon Petroleum’s Corp.’s Speedway LLC subsidiary had acquired Hess’ c-store network for $2.87 billion still caught some off guard.
“I continued to maintain … that the spinoff scenario was more likely, as it would seemingly enrich Hess shareholders the greatest, especially if you take a longer-term view,” says Ken Shriber, managing director of Chappaqua, N.Y.-based Petroleum Equity Group.
“Marathon’s offer must have represented a significant premium over what the company may have expected to receive through the IPO market,” he says. “The Hess assets are considered prime; however, there are many sites with ground leases. This makes the purchase price paid a little surprising, given an average of over $2 million per location. I would also presume that the price paid reflects a multiple of EBITDA far in excess of market, also surprising.”
“It does make you think about the publicly traded names that may be acquisition targets,” says Ben Brownlow, an Atlanta-based research analyst for Raymond James, St. Petersburg, Fla. “This all goes back to the Susser deal in 2012 when it spun off Susser Petroleum. It seems like there are newer trends towards shifting profitability between … deals.”
Meanwhile, growth has always been a top priority for Speedway. It has had its eye on the perfect acquisition for some time, Graves, says.
“We have been looking at growth opportunities for Speedway, and we’ve been building new stores in these new markets,” she says. “It’s just a great fit. We have the infrastructure to support it, and Speedway has the platform to grow the business.”
“Generally, because of tremendous consolidation taking place in the convenience store business, I would guess that Speedway’s strategy is to fill in the gaps so they become a major player,” says industry consultant Gerald Lewis. “It appears that if you’re not in the 1,000- store range—well, maybe 2,000-store range—it’s going to be more and more difficult to compete.”
Too Little, Too Late
Early this year, analysts began speculating about Alimentation Couche-Tard acquiring Hess after the company made the first move to spin off its retail network. At the time, Laval, Quebec-based Couche-Tard’s upper management commented in the press about its “capacity to do any transaction with our strong balance sheet,” and “when assets like this come up for sale, which isn’t very often, you need to be opportunistic.”
However, nothing came of it. The talk was just talk. In fact, the speculation was somewhat affirmed when Alain Bouchard himself admitted recently that he and other Couche-Tard executive wanted to “get their hands on” Hess’ network of c-stores, conceding that, in the end, the price was too high.
“We were there, but the return on investment was not there,” he said during remarks made at a Board of Trade of Metropolitan Montreal business luncheon in late May. “Marathon paid several million dollars more than the amount [Couche-Tard] was willing to offer.”
Some analysts estimated that a Couche-Tard acquisition of Hess’ retail operations would increase its earnings by as much as 69 cents per share as of fiscal 2016, assuming a $2 billion purchase price, in contrast to Marathon’s purchase price of $2.87 billion.
—Additional reporting by Angel Abcede and Greg Lindenberg
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