SAN ANTONIO -- By all accounts CST Brands has been active.
Since it was spun off in 2013 by Valero Energy Corp., the proprietor of the Corner Store retail network has acquired several retail chains, including Nice N Easy in upstate New York and Flash Foods in Waycross, Ga. It also purchased in 2014 the general partner of Lehigh Gas Partners (since renamed CrossAmerica Partners LP), a master limited partnership and wholesale distributor of fuels.
While CST’s performance lags behind other publicly traded convenience-store entities such as Casey’s General Stores and Alimentation Couche-Tard, the company has recently begun upgrading its foodservice offering and, according to sources, is exploring broadening the Flash Foods loyalty program across at least a significant portion of its 1,900-store network.
Despite CST's incremental progress, shareholder activists remain skeptical and are pushing for a sale.
“These new details continue to be disappointing and confirm that the status quo is not acceptable,” shareholder Engine Capital said in a statement. “Despite all of our concerns, we believe that CST is a valuable and strategic asset.”
Click here to read about Engine Capital’s goal to replace four positions on CST Brands’ board of directors.
The investment group on Monday spelled out the following concerns. [CSP Daily News invited CST Brands executives to offer a response to each of Engine Capital’s points. CST declined and reiterated its earlier statement that its board and nominating and governance committee will review any formally proposed nominees.]
Rising Expenses: “We are concerned by the significant increase in both operating expenses and corporate overhead based on the company's 2015 results and guidance for the next quarter,” Engine Capital said Feb. 29 in announcing its own slate of nominees for CST Brands’ board of directors. Engine Capital cites, for example, that CST’s average operating expenses rose from $420,000 per store in 2014 to $460,000 in 2015; and that corporate expenses have climbed from roughly $120 million in 2013 to a projected $156 million in 2016, a 30% increase.
“This expense growth is offsetting the increase in gross profit achieved through new-store openings de facto implying no return on the significant capital expenditures the company is making.”
Organic growth: Engine Capital raised concerns about CST Brands’ recent announcement it will spend between $450 million and $500 million in capital expenditures in 2016.
“Given the company's poor track record of operational achievements and the lower return of capital compared to peers, why not first improve the operations and get them right before spending such a significant amount of capex and potentially stretch the company's balance sheet?
“We believe the present approach is risky and that it would be prudent to grow at a more measured pace as these new strategies are proven and thus de-risked.”
CST Brands-CrossAmerica Partners relationship: Engine Capital said CST is failing to leverage the relationship in a way that boosts both entities. Engine goes on to recommend that CST entertain potential offers from third-party interests.
“We are concerned about CST dropping down valuable fuel-supply-agreement assets to CrossAmerica Partners LP at low prices in order to help CrossAmerica achieve its 5% to 7% growth in 2016.
“CST owns a collection of very valuable assets that in a sale process to another strategic buyer would likely garner a significant multiple. Why should CST sell a piece of its business at a discounted multiple of EBITDA to CrossAmerica when it could sell the entire company to a strategic party at a much higher multiple?”
Merchandise sales: Activist shareholders have expressed concern about overall in-store performance.
“As discussed in our initial letter, CST has lagged peers on this metric despite being spun out of Valero with lower average unit sales compared to many peers. CST's cumulative same-store-sales growth has been approximately 3% in the U.S. since 2013 as compared to an average of approximately 17% for its peers.”
CST Brands’ recently announced real-estate venture: The venture, Engine Capital said, “doesn't do anything to address the significant merchandising underperformance of CST. This is more financial engineering. … CST is becoming a complicated sum-of-the-parts story [that] we believe will likely trade at a further discount to its fair value.”
Mergers & acquisitions: “CST is at a competitive disadvantage when acquiring assets because it competes with better operators that can bring more synergies to the targets,” Engine Capital said.
Citing Flash Foods as an example, Engine estimates, “CST paid a multiple between 11x and 14x pre-synergy EBITDA for the asset and passed all the tax advantages … to the seller. Based on our discussions with players who participated in the auction of Flash Foods, CST paid more than two turns more in EBITDA relative to the next competitor. We also believe that the M&A strategy lacks coherence and the company would benefit from a tighter geographic strategy.”
Engine also voiced concerns that the nine independent members on CST’s board of directors have “little skin in the game,” with their cumulative ownership representing 0.15% of the company.
“Since CST became public almost three years ago, the independent board members have purchased in the aggregate only 6,500 shares of CST. This does not send a strong signal of confidence by the directors in the future of the company.”
In summary, Engine Capital urged CST Brands to “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. We believe these decisions should be made with the input of shareholders with board representation, as well as the fresh perspective of new merchandising and fuel retailing experts. We believe there would be overwhelming support for this course of action.”
Members help make our journalism possible. Become a CSP member today and unlock exclusive benefits, including unlimited access to all of our content. Sign up here.