NEW YORK -- While a sale is still only one possibility, Marathon Petroleum Corp.’s Speedway LLC, Alimentation Couche-Tard Inc. and Energy Transfer Partners’Sunoco LP are among the companies interested in a potential acquisition of convenience-store company CST Brands Inc., a source familiar with the situation told TheStreet.com.
Investment fund Engine Capital, which has a 1% stake in CST, stirred the speculation pot this week when it sent a letter to CST’s board expressing its concerns about the company’s strategy and calling it “significantly undervalued,” insisting that opportunities exist “readily within the control of the board of directors to substantially increase shareholder value.”
The letter analyzes CST’s operations, strategy, competitiveness, value and more in great detail.
San Antonio-based CST has approximately 1,900 convenience stores and gas stations throughout the southwestern United States, New York and eastern Canada. It also owns the general partner of Allentown, Pa.-based CrossAmerica Partners LP, a master limited partnership (MLP) and wholesale distributor of fuels.
Besides an outright sale of CST to one of the large consolidators, the odds of a proxy fight are also high, the unnamed source told the investing website, noting that the window to nominate directors opens in early March.
The possibility of a sale or proxy fight should trigger deja vu among convenience-store industry observers who have not forgotten The Pantry proxy wars of 2014 that ignited over differences of opinion about that retailer’s operations, strategies and value, as well as its eventual acquisition by Couche-Tard.
Engine Capital “is correct in arguing that the stock should be trading higher,” Betty Chen, an analyst with Chicago-based Mizuho Securities told TheStreet, acknowledging that CST has done a good job diversifying out of Texas, among other things, since breaking off from Valero. “Their valuation method is valid.”
Bonnie Herzog, managing director of beverage, tobacco and convenience store research for Wells Fargo Securities LLC, New York, expressed a similar opinion shortly following the Engine Capital announcement: “[We] can’t say we don’t agree,” she wrote. “After reviewing Engine Capital’s letter, we broadly believe their thesis is sound, and their arguments should be seriously considered. We share Engine Capital’s bullish outlook for CST, but equally share investors’ frustrations at the lack of performance. Management could do a better job communicating its strategy and the ways in which it can enhance value. Bottom line: We continue to see substantial upside potential for CST, and believe that with an activist shareholder outlining what we have long believed to be true, this might be the catalyst needed to get the stock to finally reflect more of CST’s inherent value.”
Besides Marathon, Couche-Tard and Sunoco, which would all make logical buyers of CST, international players including Japan’s Seven & i Holdings, which owns 7-Eleven, could also be interested in CST Brands, Chen told TheStreet. Tokyo-based Seven & I has been trying to push into the United States, she said.
CST has not issued a public statement regarding or in response to Engine Capital’s letter.
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