CARY, N.C. & LAVAL, Quebec -- For the longest time they were the two convenience-store industry thoroughbreds that outpaced the competition.
With a zeal for acquisitions, The Pantry and Alimentation Couche-Tard were locked in a tit-for-tat slugfest through the first decade of the 21st century.
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
Divergent Paths
The story begins almost 20 years ago.
In the mid to late 1990s, The Pantry got busy. Backed by investor Freeman Spogli & Co., and led by former grocery executive Peter Sodini, The Pantry galloped across the South, plucking more than two-dozen chains, most of them moderate to midsize, family-run operations.
As the century turned, Couche-Tard entered the picture, flexing its wallet to nab several significant chains in the United States before drawing awes from the industry for its audacious acquisition of the 1,663-unit retail behemoth Circle K in 2003 from ConocoPhillips.
Over the past few years, though, both The Pantry and Couche-Tard have been relatively quiet on the domestic M&A front. But for different reasons.
While Couche-Tard was transitioning its leadership to a younger generation, notably the promotion of Brian Hannasch as CEO and president, its failure to close on a major deal was not due to lack of effort. Couche-Tard pursued and was ultimately rebuffed in its 2010 hostile takeover bid of Midwestern stalwart Casey’s General Store.
And earlier this year, board chairman and former longtime CEO Alain Bouchard acknowledged the company’s interest in Hess’s retail network, only to bow out once the price climbed too high.
Couche-Tard’s M&A model has stayed intact, but the company’s disciplined course had been jackknifed in the face of unprecedented multiples driven by the wave of MLPs (master limited partnerships) capitalizing on tax advantages not available to other business structures.
The Pantry is another story.
Over the past five years, both under previous CEO Terry Marks and more recently Dennis Hatchell, the Southeastern operator has looked inward, paring down burdensome debt, investing in operational upgrades—most notably in foodservice—and grasping at a long-term strategy while confronting the eager short-term demands of institutional investors.
The Pantry was trapped by its past. The company entered the 21st century as a publicly traded company, drawing a successful IPO to help offset earlier debt. In years that followed, The Pantry saw its stock top $70, only to flatten to under $1 and risk being delisted.
Led by Sodini, The Pantry’s strategy from the late 1990s was akin to others like Convenience USA, Swifty Serve and Clark Retail Enterprises: to grow and flip, to drive an acquisition-built strategy, then flip the company at a handsome return after five to seven years.
The return never came. Most other aggregators went bankrupt. The Pantry did not. But The Pantry was put in a position it never sought: To become a true retailer, to take countless brands and stitch them into a single one, Kangaroo Express. To streamline countless point-of-sale systems and reduce the number of fuel banners into a cohesive forecourt-backcourt retail strategy.
Pete Sodini tried. Terry Marks tried. And most recently, Dennis Hatchell has tried. All to varying levels of success. Though clearly not enough to keep investors at bay.
Hatchell said it well upon the sale to Couche-Tard: “Unlocking the strategic value of these combined firms will benefit the current Pantry shareholders and provide ongoing opportunities for most of our employees.”
In the end, the best option at The Pantry was to find a buyer to stock its retail pantry.
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