SAN ANTONIO -- It was early 2014 when a pair of investment groups with not even 2% of total shares formed Concerned Pantry Shareholders and waged a proxy battle against The Pantry Inc., then the largest independent convenience-store chain in the Southeast.
The investors charged the board of directors and leadership with mismanagement, wallowing in debt and executing an aimless retail strategy. Management countered that it was growing foodservice, divesting weak assets and reducing debt load.
Sources inside The Pantry spoke of a company in disarray, one in which leadership was saying one thing while stores were doing another.
It was hardly a surprise, then, when in March 2014, shareholders gave the dissidents’ slate of board of director nominees a landslide victory that ultimately would propel The Pantry’s sale to Alimentation Couche-Tard.
More Than an Allegory
What about CST Brands Inc.? One of the shareholder dissident groups from The Pantry’s fight, Houston-based JCP Investment Management LLC, is now putting similar pressure on the San Antonio-based retailer.
But JCP is hardly alone. On Monday, New York-based Engine Capital LP said it plans to nominate four people, including three with strong c-store retail experience, to run for four expiring terms on the board of directors. Engine’s slate is:
- Rocky Dewbre, former executive vice president of channel operations for Sunoco LP and president and CEO of Susser Petroleum Partners LP.
- Bryan “Buck” Smith Jr., previously executive vice president and chief administrative officer for 7-Eleven Inc. before retiring in 2006.
- Daniel Pastor, previously CEO of MACS Convenience LLC, which was acquired in 2013 by Sunoco.
- Brad Favreau, a partner with Engine Capital Management.
The formal nomination process to the board begins March 5 and extends through April 5. Multiple sources say that the final slate by the shareholder activists is likely to change from what Engine Capital has put forth, with only Dewbre considered a lock.
By all measures, CST Brands is not The Pantry, and a likely proxy battle that unites a number of sizable stakeholders will be more challenging. Specifically:
- The company itself: CST Brands is financially and managerially stronger than The Pantry was, and its business model is more complex, with a far-flung retail network that stretches into the Northeast United States and Canada. CST also owns the general partner of CrossAmerica Partners LP, which is a master limited partnership.
- The stakeholders: Collectively, the two investment groups that have publicly questioned CST Brands—Engine and JCP—have roughly 2% ownership. The biggest shareholders have not publicly stated their position even though multiple sources say at least several are upset with CST’s performance. Unifying them behind a consensus slate may be difficult.
- Negotiations: The Pantry’s management team took an oppositional approach against shareholder activists from the outset and completely misread the tea leaves supporting widespread shareholder unrest. CST, by its own admission, agrees it must perform better and points to key retail acquisitions, store remodels and new ground-ups as important markers toward progress.
Some observers speculate that CST could be open to some kind of compromise with dissenters in a move that would keep Kim Lubel as CEO and president, while adding at least a couple of retailers with strong experience with both privately held and publicly traded c-store chains to the CST Board.
Continued: The Push to Sell
Push to Sell
Make no mistake: If CST leadership and the dissenters do not reach a deal, the stakes could not be higher.
A proxy battle would ensue, with a pro-management slate vs. a dissident-backed alternative for the board of directors.
If management’s slate wins, it will be a vote of confidence for Lubel and her strategy on how to grow inside sales, bolster foodservice offerings, reduce debt (by divesting its California network of mostly smaller parcels) and optimize real-estate holdings.
If the dissenters win, they will push for a sale of the company, and it would not be surprising to see Marathon, Speedway, Alimentation Couche-Tard or even 7-Eleven (as a defensive move to protect its Texas turf) make a play.
Consider Monday’s statement from Engine Capital. If there had been any doubt about the investor group’s ultimate motive, the following statement lays bare its intentions:
“We are increasingly of the view that it is time for the board to take a step back and start analyzing some of its strategic initiatives (like the real-estate venture, the acceleration of [capital-expenditure] spending, the additional drop downs to [subsidiary] CrossAmerica Partners LP) as part of a broader strategic review. The board and management are trying to juggle many different strategic initiatives [that] carry a significant amount of risk.
“Why not engage in a price discovery process and establish the value of CST to a third party and compare that value to the value that could be realized pursuing the riskier standalone plan of the company?
“… Given recent industry activity, we suspect that the board would find interested buyers if it explored that strategic option. In fact, we believe that management has recently rebuffed overtures to preliminarily discuss a possible combination. Engine [Capital] would be extremely concerned if independent board members are aware of and support any decision to ignore strategic options that might be in the best interest of shareholders.”
Who Will Win?
CST Brands' leadership has not commented on whether it plans to embrace Engine Capital’s board of directors slate or offer up a selection of nominees of its own.
For its part, the company has said only that it is “committed to acting in the best interests of the company and all its stockholders” and that it will “review any formally proposed nominees in accordance with CST’s corporate governance policies.”
For that matter, it is equally unclear whether key institutional investors support the four candidates Engine says it plans to nominate. “I think some shareholders will be supportive and some will not,” said one shareholder, speaking on condition of anonymity. “There’s so much frustration with [CST] that unless they put [forth] a slate with some meat, I expect there to be change.”
But when asked about Engine’s slate, the shareholder said that only Dewbre immediately stood out as possessing the necessary financial, retail and operational experience needed to help guide a publicly traded company such as CST Brands.
Who to Watch?
If multiple slates are introduced, one way to potentially gauge CST’s fate is to track activity of the company’s institutional investors.
Key players to watch include:
- Iridian Asset Management. The Westport, Conn.-based hedge fund increased its stake in CST Brands to nearly 9% as of a few weeks ago. Iridian is known to bet aggressively on companies facing major changes. Its website states: “Investing in corporate change is the cornerstone of Iridian’s mid-cap investment philosophy, where the fund focuses on companies undergoing significant corporate change.” Sources tell CSP Daily News that Iridian is not satisfied with CST's current strategy and could very well support an alternative four-member slate to the board of directors.
- Vanguard Group, which through December 2015 controlled 6.5% of CST shares. Vanguard last week said CST’s price-to-earnings ratio, which stands at 17.02, was expected to reach 17.65 this year and fall to 15.29 next year.
- Advisory Research, whose holdings have grown from nearly 4.3% last fall to more than 5.5%.
- Champlain Investment Partners, which last November upped its stake in CST Brands by more than 70% as the retailer’s share value was sliding. The company is considered to be bullish about CST’s growth prospects. What’s uncertain is whether the aggressive posture is built on confidence in the current management team or in the dissidents’ push for a third-party buyer.
- Pennant Capital Management. The Summit, N.J.-based hedge fund controlled 3.5% through the end of 2015 and has since upped its stake to roughly 4.5%.
CST’s annual shareholder meeting is scheduled for the spring.
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