Analysis: Why CST's Lehigh Acquisition Is More Than Price Tag Reveals

One factor key to understanding complex strategy that brought these players together

Mitch Morrison, Vice President of Retailer Relations

CST Corner Store Lehigh Gas (CSP Daily News / Convenience Stores)

SAN ANTONIO – Let's be clear. Last week's deal between CST Brands Inc. and Lehigh Gas Partners (LGP) is big.

Don't be fooled by the $85-million price tag. When compared to the multi-billion-dollar deals of Energy Transfer Partners and Susser Holdings, or Speedway and Hess, this deal at first glance seems like a blip, dismissed by a fly swatter.

But in the world of master limited partnerships (MLPs), what you see isn't always what you get.

Despite the flowery language of partnership and team, CST Brands--the retail network spun off by Valero last year--is the acquirer. This is their move by a team not unfamiliar with dramatic growth as part of Valero's surge in the late 1990s and early 2000s. This deal is also a real win for entrepreneurial Lehigh CEO Joe Topper. He was responsible for pursuing an MLP strategy for Lehigh and has parlayed it into a string of modest-size acquisitions that rapidly has grown the Bethlehem, Pa., fuel wholesaler.

But Lehigh faced a problem that Topper and his leadership team acknowledged in early May on the heels of ETP's acquisition of Sussers. It frankly wasn't big enough to compete against the biggest MLPs.

"I would tell you that they paid a formidable price, and the larger acquisitions get at that pricing, that will be a drag on us doing larger deals," LGP president Dave Hrinak said during the company's first-quarter 2014 earnings call, alluding to the ETP-Susser purchase.

Hrinak and Topper know the full muscle of ETP well. Lehigh bid on both the Mid-Atlantic Convenience Stores (MACS) last year and Tigermarket earlier this year, only to see ETP win on both.

Seeing ETP stretch the multiples on those acquisitions, Topper said, "The higher end of it was driven by ETP in the deals that we did not get."

"I think some buyers are trying to take advantage of interest rates at the level that they're at to lock in some financing at this rate and buyers would be more aggressive there and are willing to sell for," he said during the earnings call. "So, I think it's a combination--there were some aggressive buyers out there, there are some interest rate risks that people were trying to lock in, and I think sellers were asking for more."

Topper's insights lead to these conclusions:

Continued on next page.

Part of CSP's 2014 Convenience Top 101 retailers


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