Inside Casey’s Bid for Kroger’s C-Stores

Greg Lindenberg, Editor, CSP

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ANKENY, Iowa, and CINCINNATI -- Two of the biggest convenience-store industry news stories of recent times have crossed paths. With two top-10 c-store chains contemplating whether to put their stores up for sale, reports indicate a deal could be in the works for the two to become one.

Under pressure from Houston-based activist investor JCP Investment Management, Casey's General Stores Inc. has submitted an initial bid for Kroger's nearly 800-unit, $4 billion convenience-store network, sources familiar with the situation told CNBC.

"Casey's is one of several parties looking to buy the stores," the report said.

"We don’t comment on speculative [mergers-and-acquisition] activity," Bill Walljasper, CFO of Ankeny, Iowa-based Casey's, told CSP Daily News; however, he did say, "Any evaluation of a potential acquisition is driven off creating value for our shareholders."

Kroger did not respond to CSP Daily News requests for comment by posting time.

Here are the details …

Kroger: The facts

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Supermarket retailer Kroger Co. has 2,793 retail food stores under several banners in 35 states and the District of Columbia, 1,472 supermarket fuel centers and the ClickList online grocery delivery service.

Kroger also operates five convenience-store divisions with a total of about 785 c-stores (more than 725 with fuel) in 18 states:

  • 129 Kwik Shop c-stores in Iowa, Kansas and Nebraska (based in Hutchinson, Kan.)
  • 170 Loaf ‘N Jug c-stores in Colorado, Montana, North Dakota, Nebraska, New Mexico, South Dakota and Wyoming (based in Pueblo, Colo.)
  • 101 Quik Stop c-stores in California and Nevada (based in Fremont, Calif.)
  • 117 Tom Thumb c-stores in Alabama, Florida, Mississippi and Tennessee (based in Crestview, Fla.)
  • 267 Turkey Hill Minit Markets in Indiana, Ohio and Pennsylvania (based in Lancaster, Pa.)

The c-stores range from 1,130 to 6,110 square feet, averaging 2,954 square feet.

In 2016, the c-stores accounted for 4% of Kroger’s total sales. The c-stores also offer a variety of Kroger private brands. The typical c-store stocks about 3,600 items, with about 75% of nonfuel sales in five categories: packaged beverages, beer, snacks, candy and tobacco. The foodservice category of Kroger’s c-store business accounted for about 12% of nonfuel c-store sales for 2016. Fuel sales represented about 65% of Kroger’s total c-store sales in 2016.

The c-stores partner with Kroger supermarkets on fuel rewards. Nearly all of the c-stores offer its loyalty-card program.

Kroger's c-stores ranked No. 8 in a year-end update of CSP’s 2017 Top 202 list of the largest c-store chains in the United States.

Kroger: The decision


In October 2017, ahead of its annual investors conference, Kroger announced Restock Kroger, a new initiative “to redefine the food and grocery customer experience in America” and to combat the competitive threat of rivals such as Amazon’s Whole Foods, Walmart, Lidl and Aldi.

At the same time, Kroger also said it would explore strategic alternatives for its convenience-store business, including a potential sale, following a review of “assets that are potentially of more value outside of the company than as part of Kroger.” It hired Goldman Sachs & Co. to identify, review and evaluate the options.

Kroger has not yet officially announced a decision on whether it will sell the c-stores, although several reports suggest the stores are on the market.

Casey’s: The facts

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Casey’s General Stores has more than 2,000 convenience stores in 15 states. The nine core states are Iowa, Illinois, Missouri, Kansas, Minnesota, Nebraska, Indiana, South Dakota and Wisconsin. States new to Casey’s within the past 10 years are Arkansas, North Dakota, Oklahoma, Kentucky, Tennessee and Ohio.

Casey’s ranked No. 4 on CSP's 2017 Top 202 list of the largest c-store chains in the United States.

The chain traditionally grows via new-to-industry sites and small, sometimes one-store acquisitions. To support its growing network, Casey’s opened its second distribution center, in Terre Haute, Ind., in early 2016 and is planning a third facility.

Because of its “strong balance sheet and expanded geography,” Casey’s is “positioned very well for future growth,” Terry Handley, president and CEO, said during the company’s earnings call in December. “The company is well-positioned to take advantage of a consolidating market and drive unit growth at faster levels than we have in the past. We will look to augment our new-store construction activity with acquisitions in both new and existing markets.”

Casey’s: The challenge

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JCP Investment Management LLC, BLR Partners LP and Joshua E. Schechter, a group of Casey’s shareholders that together own about 1% or $45 million worth of the retailer’s stock, in early January issued an open letter to all Casey's shareholders suggesting that the chain is “significantly undervalued.” It urged the board to “immediately engage a financial adviser to explore all strategic alternatives, including a potential sale, merger or similar transaction in order to maximize shareholder value.”

While it has acknowledged JCP's letter, Casey's has not announced officially whether or how it will react.

Buying Kroger's c-store business could stave off pressure to sell, the sources told CNBC.

JCP: The activist investor

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JCP Investment Management was instrumental in the sale of The Pantry Inc., Cary, N.C., to Laval, Quebec-based Alimentation Couche-Tard Inc. in 2014 and was part of a settlement agreement with San Antonio-based c-store company CST Brands Inc., which resulted in a sale to Couche-Tard in 2016.

“We believe Casey's shares are significantly undervalued as they do not reflect the true earnings power and full real-estate value of the company's irreplaceable fleet of 2,000-plus stores,” James Pappas, managing member of JCP, said in the letter to shareholders. “We have previously engaged with management regarding our concerns with the company's returns on invested capital and capital allocation. Casey's no longer delivers best-in-class returns as measured by either operating metrics or share price performance. Casey's has missed earnings targets for seven straight quarters due in part to decelerating same-store sales and bloated operational expenses.”

The letter also claims that Casey’s has expanded too rapidly. “We are concerned that Casey's store-level returns on invested capital have declined as the company has gone from operating in nine states to 15 states,” it said. “We believe such rapid expansion coupled with seeming declining returns on invested capital is symptomatic of a company that has been unable to manage growth effectively.”

Concluding that a strategic review that could lead to a sale is necessary, the letter says that “the gap between Casey's current share price and its strategic value is significant. We do not believe that waiting for an increase in share price in the face of significant declining EBITDA is the prudent path to take.”


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If Casey's acquires all of the Kroger c-stores, it would add 10 new states to its 15-state network: Alabama, California, Colorado, Florida, Mississippi, Montana, Nevada, New Mexico, Pennsylvania and Wyoming.

Casey's, which is working with an investment bank, is one of several parties looking to buy the Kroger c-stores and may not ultimately be the victor. Final bids are due in early February, the sources told CNBC.

Alimentation Couche-Tard, as well as Irving, Texas-based 7-Eleven Inc., El Dorado, Ark.-based, Murphy USA, Findlay, Ohio-based Marathon Petroleum Corp. (Speedway) and Richmond, Va.-based GPM Investments LLC, are among other companies that could make bids for Kroger’s c-stores.

Of course, Casey’s itself could be acquired, possibly by one of the same list of players, in the event that the company makes the decision to put the publicly owned chain up for sale.

In 2010, Casey's successfully fended off a series of hostile bids from Couche-Tard. 7-Eleven also made a bid for Casey’s at that time but did not consummate a deal. The same determination could still be at work in the current situation.

“The company is focused on generating increased long-term value for shareholders through new initiatives to accelerate same-store growth and returning cash to shareholders through share repurchases and a steadily increasing dividend," Handley said in the press statement responding to JCP’s letter. "With the combination of the company’s growing acquisition pipeline, new-store construction activity, new initiatives aimed at enhancing operations—such as digital engagement and price-optimization projects—Casey’s expects to deliver substantial value for its shareholders.”

That does not sound like a company on the brink of a sale. But stranger things have happened in the unpredictable convenience-store industry.