Industry Reacts to Kroger’s C-Store Sale

Greg Lindenberg, Editor, CSP

kroger c-store eg group

CHICAGO -- A much-anticipated deal took a very unexpected turn in early February when The Kroger Co. sold its convenience-store division to EG Group, a little-known U.K. company for $2.15 billion.

Industry observers have long predicted that Kroger would sell its nearly 800 c-stores, acquired in the 1980s. When the company announced in October 2017 that it would conduct a strategic review of the convenience division, speculation about potential buyers focused on several companies, including Alimentation Couche-Tard Inc., the Laval, Quebec-based owner of the Circle K c-store brand; 7-Eleven Inc., Irving, Texas; Casey’s General Stores Inc., Ankeny, Iowa; and Marathon Petroleum Corp., the Findlay, Ohio-based owner of the Speedway c-store chain.

In late January, Casey’s reportedly put in a bid for the Kroger c-stores at the urging of activist investors. But a wild card, Blackburn, U.K.-based EG Group, also known as Euro Garages—a privately held petroleum forecourt and convenience retailer with operations in the United Kingdom, Belgium, The Netherlands, Luxembourg, France, Italy and most recently Germany—took the prize.

The companies expect to close the transaction during the first quarter of Kroger's fiscal year. When this deal is complete, EG Group, which previously had no U.S. retail presence, will immediately become one of the 20 largest c-store chains in the United States. It will establish its North American headquarters in Cincinnati, where Kroger is based, and it will continue to operate the former Kroger-owned c-stores under their established regional banners: Kwik Shop, Loaf ‘N Jug, Quik Stop, Tom Thumb and Turkey Hill Minit Markets, the company said.

Here’s a selection of what industry analysts and experts are saying about EG Group's successful and Casey's unsuccessful bids for the Kroger c-stores…

kroger restock

This is a very surprising development to all of us, that neither 7-Eleven, Alimentation Couche-Tard, Casey’s nor Marathon Speedway became the acquirer; however, it speaks to the quality and strength of the U.S. economy as well as expected future growth in the retail gasoline and convenience-store sector. At more than $2.8 million per site, EG Group may have even paid a premium price to enter the U.S. market.

—Ken Shriber, managing director and CEO, Petroleum Equity Group, Chappaqua, N.Y.

This purchase price is lower than we (and we think the market) was expecting, but ultimately it is good to see this process finalized as it should help the company move forward with greater focus on its Restock Kroger initiative.

Kroger intends to sell its convenience-store business to EG Group … for $2.15 billion.

This represents 8.8x our estimate of the Kroger c-store EBITDA of $244 million. We had previously expected the company to receive approximately 10x EBITDA or $2.4 billion, and the feedback we had received from investors suggested that most were expecting a similar value (approximately 10x/$2.4 billion) for the business.

Additionally, there had been rumors … that Casey's General Stores was among the bidder group. While it is disappointing to not see Casey’s come out on top in the bidding process for these assets, the purchase would have presented considerable operational challenges and would have stressed the company's balance sheet.

—Ben Bienvenu, analyst, Stephens Inc., Little Rock, Ark.

kroger logo

[The sale gives Kroger] an opportunity to pay down debt or to pay for some of the new initiatives they have announced. The convenience stores are a different business model with an even bigger exposure to fuel costs than the traditional grocery.

—Lori Hudson, vice president and principal, Bahl & Gaynor, Cincinnati

[Kroger’s c-stores are] not part of their online business. In that way, it’s kind of expendable. I think they’re going to focus on their core business.

—Joseph Agnese, analyst, CFRA Research, New York

caseys general stores

While a partial deal could have been highly accretive, we appreciate Casey’s management’s decision not to overreach for the entire package.

For Casey’s, a slice would have tasted good, but the entire pie may have provided serious indigestion. Although we would have liked to have seen Casey’s acquire a number of the stores (we estimate approximately 165 within the company's distribution center radius), we appreciate management showing solid restraint despite recent activist pressures to explore strategic alternatives of its own as a 762-store undertaking posed significant execution risk in our view. Moreover, we believe such a purchase would have potentially hurt Casey’s valuation in the eyes of buyers if it were ever to be sold as operators like Alimentation Couche-Tard clearly were not big fans or willing to pay a premium for the Kroger assets.

[EG Group is a] new player in the market—can they succeed where many foreign operators have failed? EG Group, a privately held and well-scaled EU c-store retailer, will operate the sites under their current banners (retention of Kroger's fuel rewards program, a key driver of fuel volumes, is unknown). While ... establishing a North American headquarters in Ohio would seem to indicate plans for bigger things, potentially additional M&A, we hesitate to describe this as a material shift in the competitive landscape given lack of deep knowledge on EG's fuel and in-store strategy (initially it looks like a branded and national QSR partnership approach, nothing proprietary or differentiated). Moreover, this is the company's first venture into the United States; a lot can go wrong if EG hasn't done its homework and doesn't understand U.S. culture and shopping habits.

—Christopher Mandeville, equity analyst, Jefferies LLC,  New York

euro garages

Euro Garages has grown very rapidly. In the U.K., they are not convenience-store operators in the traditional sense, because they master franchise groups of existing branded fast-food and related operations in food court-type facilities on motorways, rather than developing and operating their own programs.

Where has the money come from for this deal? It is difficult to understand how such a relatively new company could have sufficient financial strength to make both the German Esso acquisition and the Kroger one, regardless of their great success.

The reason for the acquisition could be as simple as the desire to take advantage of the once-in-a-lifetime opportunity instantly to become a major player in the U.S. market. This could also be buttressed by the thinking that has been the downfall of several U.K. and European companies that, having been successful in Europe and the U.K., they have some formula that no U.S. companies have thought of that will beat the competition here.

Retailers from the other side of the pond have not had great success with their U.S. entries. But starting with the profitable, stable and strong base of the Kroger store groups will be a great advantage for them, as compared to companies like Tesco [Fresh & Easy] and Lidl that started from scratch. So, if they are content to take their time and learn before they leap, they might be successful. On the other hand, bearing in mind the high price they have paid, this probably won’t generate quickly enough the required return on their investment. So, if this causes them to make quick changes before they understand the competitiveness, complexity and sophistication of the American market (or the fact that it is really 50 separate state markets), they will pay the price.

If they think their “secret sauce” is to introduce the type of roadside food-court facilities that they operate in the U.K., they will find out that what they did in the U.K. was reinvent the rest stops that already exist along major U.S. toll roads—facilities containing a number of convenience-type shops and branded foodservice counters—and that there is no need for these in the areas that are served by the Kroger store groups. Because of the density of population in the U.K. (60 million people in an area less than one-fifth the size of Texas) there is a need for far more of these in any given area of the U.K. than in the United States, where there is no similar need for this level of density. There is also no shortage of convenience stores, many with strong foodservice offerings (including branded ones) in the markets covered by the Kroger c-store companies or in any area of the United States.

So the bottom line is that EG may be in for some surprises.

—Gerald Lewis, consultant, New York