Mergers & Acquisitions

2020 Top 202: Consolidation Interrupted

COVID-19 has cooled off heated M&A activity. When will things get hot again?
Photo illustration by CSP Staff

CHICAGO — Mammoth, global deals were in the works just before the hard stop of COVID-19.

7-Eleven’s parent company in Japan was negotiating for Speedway in the United States, while Alimentation

Couche-Tard and EG Group were battling for Caltex, an Australian energy firm with refineries, distribution and hundreds of retail assets. Suffice it to say that the world’s major convenience-store chains were fiercely negotiating major transactions.

Then … nothing.

Like the crowds in Times Square, on Chicago’s State Street or at Hollywood and Vine, the heat of merger-and-acquisition (M&A) activity in the channel evaporated under the crushing weight of mandatory business closures and governors’ orders for everyone to stay at home.

“It’s fair to say that the coronavirus has slowed down just about everything,” says Arie Kotler, CEO of GPM Investments LLC, a Richmond, Va.-based c-store chain known for growth through acquisition. “At this time, we are concentrating on our employees and customers … adding essential products like hand sanitizers, wipes and masks.”

But that doesn’t mean the self-described “opportunistic” acquirer is taking its chips off the table. “Our M&A team continues to evaluate opportunities for acquisitions,” Kotler says.

Click here to view the complete Top 202 list.

This year, CSP’s Top 202 ranking of convenience chains—documenting the industry’s 2019 store count by calendar year—had its share of shake-ups. Gone from the list are standbys such as Cumberland Farms and Allsup’s, while the likes of Yesway and EG America vaulted up the standings.

Some of the more significant acquisitions of 2019 (see related story) included:

  • EG Group’s series of acquisitions, including Fastrac, Certified Oil and the 562-store Cumberland Farms.
  • BW Gas & Convenience Holdings’ purchase of Allsup’s 304-store chain, which joins the growing Yesway platform.
  • GPM Investments’ purchase of 63 stores from Riiser Fuels LLC, as well as the announcement of its purchase of fuel distributor Empire Petroleum that included 77 retail locations.
  • ExtraMile’s expansion through franchisee recruitment.
  • New construction from mainstays such as QuikTrip, Casey’s General Stores, Wawa, Sheetz and RaceTrac.

Until the fallout from COVID-19 became brutally apparent in mid-March, the consolidation game was in full force. Now the picture has changed, says Roger Woodman, managing director of Raymond James, St. Petersburg, Fla.

While the pandemic and subsequent stay-at-home restrictions resulted in an immediate slowing of M&A activity, we expect the pre-COVID-19 consolidation trend to continue and that convenience store businesses will be well-positioned once the COVID-19 situation abates,” he says.Many c-store operators entered the COVID-19 crisis experiencing record profitability, healthy leverage and ample liquidity. While no one could have predicted the extent of the economic shut down, industry operators are extremely fortunate to have entered this downturn from a position of strength.

Fortunately, c-stores as investments are proving resilient. In many states and metro areas, authorities have deemed the convenience channel essential, unlike restaurants, many of which have had to close or limit their offer to drive-thru, takeout or delivery. Regional, national and international strategic buyers continue to have a need for growth and scale to gain market share in an increasingly competitive industry and a strong appetite to acquire high quality, strategic assets,” Woodman says. Further, we see the current operating challenges and industry headwinds sparking renewed seller interest in potential transactions. Once the COVID-19 situation abates, we believe that convenience store businesses will be well positioned from a valuation perspective.

“We’re seeing another example where the industry proves its mettle and in many cases [is] coming out stronger,” says Michael Phelps, managing director, group head of convenience and fuels finance for Citizens Bank NA, Providence, R.I. Retailers are telling him “how proud they are of staff, clerks and c-store personnel taking care of customers, wearing shields, gloves and masks. And customers are happy they’re open. We’ve seen it in the wake of hurricanes: C-stores [are] first to open.”

Before the Fall

The start of 2020 was promising from an economic standpoint. Retail sales grew consistently from a low of about $350 billion in 2010 to $525 billion by 2019, according to U.S. Census Bureau data shared by economist Anirban Basu during the NACS State of the Industry Summit Virtual Experience. Up until the early spring, the U.S. stock market was on a historic climb, doubling in value from the 2008 recession, Basu said. Interest rates, meanwhile, were at record-low levels.

The c-store industry was coming off a strong 2019, mirroring its record performance from the year before, according to preliminary NACS State of the Industry data. Inside sales hit a 25-year record high of $251.9 billion, while pretax profits rose 8.4% to $11.9 billion, another industry first.

Amid that buoyancy, the M&A picture was bright.

7-Eleven had announced its acquisition of about 100 stores from an independent Oklahoma City-based franchisee, 7-Eleven Stores. And Charleston, S.C.-based FR Refuel LLC, a fast-rising chain in CSP’s Top 202 ranking and a portfolio company of private equity firm First Reserve, Stamford, Conn., bought Double Quick, a 48-store chain based in Indianola, Miss.

“People pay based upon historical performance, not projections.”

In an April 23 press release announcing the closure of the sale, which was made for an undisclosed sum, Double Quick co-owners Tom Gresham and Bill McPherson thanked their staff for upholding values of honesty and teamwork for the past 36 years to make the chain a highly valued portfolio. This was one of the last deals to close before the pandemic hit.

Other deals that began to form during this time did not fare as well.

One of the more significant deals to collapse ahead of the pandemic was between Seven & i Holdings Co. Ltd., the Tokyo-based parent of 7-Eleven Inc., the No. 1 U.S. chain in CSP’s 2020 Top 202 rankings, and Marathon Petroleum Corp., Finlay, Ohio, for its 3,900-store Speedway chain.

Seven & i had bid $22 billion for Speedway, according to both Bloomberg and the Nikkei Asian Review. But after Marathon Petroleum countered, Seven & i balked at the higher asking price. That and growing economic concerns as the pandemic spread in Asia ended negotiations in March, according to reports.

Around the same time, EG Group, Blackburn, U.K., and Laval, Quebec-based Couche-Tard were in talks to buy Caltex.

The Sydney-based refiner-marketer had rejected an initial bid from Couche-Tard and EG’s counterbid.

As Couche-Tard kept up negotiations with Caltex, the bottom fell out of oil. The price war between Saudi Arabia and Russia sent crude prices plummeting, creating a disastrous selling position for Caltex. Couche-Tard ended negotiations, but it didn’t close the book on a future deal.

“We remain convinced of the long-term financial and strategic merits of an acquisition of Caltex and all the benefits it would offer to the shareholders of both companies,” said Brian Hannasch, president and CEO of Couche-Tard, which owns the Circle K brand, in an April press release. “Despite the COVID-19 situation, we have worked to complete due diligence on schedule through a significant investment of time and money. Our current plan would be to reengage the process once there is sufficient clarity as to the global outlook, and the work done to date should mean that we will be able to quickly formalize our proposal at that time.”

Congressional tolerance for M&A was also turning. In late April, Democrats in the U.S. Senate introduced the Pandemic Anti-Monopoly Act to impose a moratorium on mergers and acquisitions, an eff ort to “stop large corporations from exploiting the pandemic to engage in harmful mergers.”

The coronavirus disrupted what was setting up to be a potentially record-breaking year of industry growth.

Corona Economics

Despite the industry’s “essential” status, the pandemic has hit c-stores—especially their fuel business—hard.

Nationally, the number of gallons purchased per week from Jan. 6 to April 6, 2020, dropped 39.9%, according to San Francisco-based analytics firm Skupos Inc. In-store revenues were down about 6% weekly beginning in mid-March before finally rising in mid-April.

During a Study Groups webinar in early spring, Johnny Milazzo, president of Lard Oil Co., Denham Springs, La., said fuel volumes had dropped as much as 44% in the days following shelter-in-place orders in his state, while inside sales had fallen as much as 20%.

Among his convenience and fuel-distributor clientele, Phelps of Citizens Bank has heard of fuel demand down anywhere from 35% to 70% in some major metropolitan areas. Inside the store, he has heard ranges of 25% to 50%. Within his purview as a banker, Phelps says his division oversees 45 customers in the convenience and fuel space and has $2 billion under management deployed in the industry.

“The stores that have not kept up with the modern evolution on foodservice are going to be left in the dust.”

Of the customers currently in c-stores, “they’re saying everyone has boots,” Phelps says. “People in the stores are contractors or cowboys, your basic c-store customers … and nurses, people who go into work every day. [Meanwhile,] soccer moms, the guy in a suit—they’re not there. It’s distilled down to the basic c-store community.”

These economic conditions have scrambled the plans of retailers looking to sell in 2020. In particular, valuations have become a moving target because they are typically based on a business’ historic earnings before interest, taxes, depreciation and amortization (EBITDA).

“Valuations are going to be interesting as they’re driven by cash flow,” Phelps says. The first quarter of 2020 was strong for most c-stores, he says, but the second quarter will take a big hit. “Those [financials] are an important part of the appraisal process. It drives multiples and flow of capital.”

In that scenario, a seller may base valuations on a sustained period before the crisis, says Dennis Ruben, executive managing director of NRC Realty & Capital Advisors, Chicago. The buyer, on the other hand, will want to look at the most recent months.

The biggest question is: How long will the downward trend in numbers continue? “It’s pretty hard to tell somebody, ‘Oh, ignore what’s happened because this is an anomaly,’ but that’s the reality we’re in,” Ruben says. “I don’t see how you could tell a buyer to ignore what these stores are doing. People pay based upon historical performance, not projections.”

Beyond complicating valuations, the pandemic has also rattled the larger lending ecosystem. Phelps says many of Citizens Bank’s staff have had to shift to processing the Small Business Administration’s injection of federal relief loans through the Coronavirus Aid, Relief and Economic Security (CARES) Act, a task made difficult by the government’s largely manual infrastructure.

“It has crushed all banks in terms of processing ability,” he says.

Still, lending is occurring, Phelps says. Construction projects continue because the banks don’t want to leave building grounds fallow.

“But capital is more expensive right now because the first reaction of most midsized companies is to draw down any [credit] revolvers,” he says. “That makes capital more dear until lines are repaid.”

Phelps says the adage “Time kills deals” may now be giving way to “Time is your friend” regarding a big acquisition.

“We have some deals in flight that will close on target, and we’ve seen some deals also slow down quite a bit,” Phelps says. “The objectives have not changed, whether it’s to acquire or divest, but you can’t do due diligence.”

The gumming up of normal mechanisms has led to a general conservatism around new deals and a higher cost of credit, Ruben says. “People are asking for security deposits, for rent deposits or prepaid mortgage payments when they weren’t before,” he says. “So I think the lending side has become very tough right now, which means that if people are depending upon a lender to close the deal, it’s going to be more challenging.”

Creative deals could still occur. For example, a buyer and seller might agree on a base price, and if the stores do well, the buyer pays the seller an additional amount, Ruben says. Or parties may simply calculate multiples differently, Ruben says. Some look strictly at store-level EBITDA, while others factor in “synergies” and cuts in duplicate staff and infrastructure. The goal is making the numbers work for all parties.

But whatever the formula, multiples will most likely fall in the near term. Over the past two or three years, purchase-price multiples “have gotten crazy,” with new acquirers “bidding up” high-quality assets, Ruben says.

“When this thing settles down, I don’t think you’re going to see multiples where they were before,” he says.

Brave ‘New Normal’

The other aspect of growing a chain’s value is new construction, which has also slowed. Phelps of Citizens Bank says construction in progress will continue but new projects may be on hold because of the same paralyzing issues plaguing M&A. Inspectors aren’t working.

Public resources, county offices and courts are shut down, which makes getting titles, zoning changes or liquor licenses difficult.

Part of the issue of value will lie in how a chain has evolved its business model, Ruben says, especially now that the pandemic has reconfigured people’s habits and priorities. Health concerns, for example, are raising the importance of contactless transactions.

“The Wawa concept probably works OK, where you push a button and somebody behind the counter is making a sandwich,” Ruben says. “The stores that have not kept up with the modern evolution on foodservice are going to be left in the dust.”

As the country deals with the pandemic’s uncertainties, it may be a year or two before the picture becomes clear. In-store processes may change, and multiples will most likely fall a point lower if not more, Ruben says.

“What’s the ‘new normal’ going to look like?” he says. “I don’t think anybody can predict that yet.”

Click here to view the complete Top 202 report.

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