Analysis: When Owl Met ’Roo
How two M&A giants on divergent paths finally converged in a blockbuster deal
CARY, N.C. & LAVAL, Quebec -- For the longest time they were the two convenience-store industry thoroughbreds that outpaced the competition.
The Pantry zeroed in on the highly fragmented Southeast, seeking to consolidate smaller c-store chains under the Kangaroo Express brand. Canada-based Couche-Tard stretched its buying strength across the United States and Canada, spreading the Circle K c-store brand across the U.S. from its Texas roots.
Last Thursday, the battle came to a formal end. Couche-Tard announced its acquisition of The Pantry for $36.75 per share, or $1.7 billion, of which roughly half is to pay off The Pantry’s debt. The deal—when factoring debt—is the industry’s third in a year to exceed $1 billion, preceded by Speedway’s $2.8-billion purchase of Hess, and Energy Transfer Partner’s $1.8 billion acquisition of Susser.
A Tumultuous Year
For The Pantry, the deal—to close in the middle of next year—caps a tumultuous year that began when two institutional investors holding just 2% of stock in the country’s fifth-largest c-store chain staged a proxy battle in January.
Lone Star Value Management LLC and JCP Investment Management LLC didn’t like the direction of the company. They didn’t like that The Pantry’s market value paled to other publicly traded convenience chains, like Casey’s General Stores or Susser Holding. They didn’t like The Pantry’s massive debt and sale-leaseback structure on most of its retail portfolio.
Most importantly, they didn’t trust the leadership.
The dissenters, calling themselves Concerned Pantry Shareholders, rolled out a slate to counter the expiring terms of three incumbent board members, including The Pantry’s powerful chairman Edwin Holman.
On March 13 at The Pantry’s annual shareholders meeting, the dissident faction won decisively. Some shareholders called it, “The coup at ’Roo.”
The dissidents said all options to improve results at The Pantry were on the table. The buffet included:
- Reassess capital expenditures to focus on return on invested capital (ROIC) and pay down excessive leverage. The Pantry, CPS contended, had failed to produce any return to shareholders after 10 years of spending $1.9 billion in capital (capital expenditures plus acquisitions).
- Strengthen the store base by repositioning or selling between 300 and 500 stores in weak or non-growth markets and focusing on strong performing stores in core markets.
- Implement a successful QSR plan by tapping the three new board directors' expertise in quick-service restaurants and operations.
- Enhance corporate governance through direct shareholder representation on the board, decreased board pay, provisions that allow shareholders to act by written consent and to call special meetings, and a stop to any further shareholder dilution (share count is up almost 30% since 2002).
- De-leverage the balance sheet by slowing capital expenditures, increasing focus on ROIC (increasing EBITDA) and paying down debt with reasonable free cash flow.
- Explore real-estate monetization in order to continue to deleverage the balance sheet through a full sale, partial sale, or master limited partnership (MLP) or real-estate investment trust (REIT) formation.
Less publicized but privately acknowledged was a piece of that final option: Sell. Dissenters said their ultimate goal was to enhance shareholder value. If staunching the bleeding could not be achieved through traditional means, then selling the company would be a consideration.
To The Pantry’s credit, it has enjoyed a solid year. The company opened new and larger stores, shuttered some underperforming assets, improved in-store sales and benefitted from the recent fall in fuel prices. But long-term, the company was staring at intensifying competition from the likes of Sheetz, RaceTrac and QuikTrip. And The Pantry was burdened by a glut of small, outdated stores and onerous leases.
CONTINUED: The Companies' Divergent Paths