Banking on More Deals

Continued trading of c-store assets among likely byproducts of credit crisis

OAK BROOK, Ill. -- The aftereffects of the recent U.S. credit crunch have included everything from foreclosures and expansion to litigation and takeover bids, with the common thread being the banking crisis' effect on current lending relationships. For some, the current environment is perfectly suited to quick bursts of growth, while others weathered the storm of 2009 only to bow out before conditions worsened any further.

Industry experts suggest operators who are not either "too big to fail" or small enough to sufficiently rein in expenses could be particularly vulnerable. [image-nocss] This trend, carried over from the first decade of the 21st century, will likely spur industry consolidation, according to Michael Lederman, managing director and head of the "special situations group" for Memphis, Tenn.-based Morgan Keegan & Co.

"Today there is a combination of issues, and they play out in various ways in various markets, and a lot of those issues depend on the company itself," Lederman told CSP Daily News. "There's also something we call 'the barbell trend.' There are small companies with great stores who don't need the overhead of divisional managers, and of course there are the major operators with 800 to 1,000 stores. In between is the bar of the barbell, and that's where the squeezing is getting really rough."

More than store count alone, however, is dictating a "continued trading of assets and properties," according to Joseph Sands, managing director for Morgan Keegan.

"A lot of the baby-boom generation is planning to sell and retire, so there is a huge cause for transfers of control," Sands said. "You've also got pressures occurring on different operators throughout the industry, where people get to a point where it's just not worth doing anymore; if they're not distressed sales, they're definitely pressured sales...It goes back to the whole barbell trend: The guys in the middle need to get bigger or get smaller."

Growth-hungry operators have more options than in recent years to help fund ground-ups and acquisitions, according to lenders, though borrowers need to work harder to qualify for loans and in many cases must put up more of their own equityan additional 10% to 15% of the purchase pricethan just a few years ago. Furthermore, the transactions most lenders are willing to finance are comparably small, which can make it quite difficult, for example, for a chain of 200 stores to grow to 750. In some cases, according to Sands, at-risk companies might seek out "strategic partnerships" in which two midsized operators combine forces, without a need for significant financing.

"The merger is more theoretical," he said, "with the companies saying, 'Each of us is too small on our own.' This is a good solution for both companies, each of which might be overleveraged, and together they could become a much bulkier, more formidable company afterward...For the middle guys who have to spend significant amounts just to maintain that middle position, it becomes untenable, and they are highly at risk."

Morgan Keegan encourages companies not to "fall in love" with store count, according to Lederman, and instead to carefully examine their portfolios from both ends: which stores are performing well and which stores have bottomed out.

"A lot of companies spend too much time on the losers," he said. "It's important for operators to be objective. When something doesn't work, you have to have the discipline to...not have it become a hit that drags on for years."

For sellers, according to Terry Monroe, president and COO of St. Louis-based American Business Brokers, there may be no better time than the present.

"From a high point of a few years ago, you're not going to get top dollar today," he said. "But I still think it's a good time for sellers. My position is this: Know how people like to say, 'Remember the good ol' days?' We are living in the good ol' days now. If you look at the historical account of c-store valuations, they've done nothing but decline over the last five years.... If you procrastinate, you'll get less."

Look for more on operators' opportunities and challenges within the current lending climate in the July issue of CSP magazine.