SAN ANTONIO & ALLENTOWN, Pa. -- In a move that heightens the petroleum and convenience store industry's fervor over the master limited partnership (MLP) structure, c-store retailer CST Brands has arranged to buy Lehigh Gas GP LLC, an aggressively growing MLP, for an estimated $85 million, essentially giving itself a tax-friendly way to acquire cash and speed its growth.
CST Brands has entered into definitive agreements to purchase 100% of the membership interests of Allentown, Pa.-based Lehigh Gas GP, the general partner of Lehigh Gas Partners LP, from Lehigh Gas Corp. and all of the outstanding incentive distribution rights (IDRs), the units that make up ownership, of Lehigh Gas Partners. The price will be $17 million in cash and approximately 2.044 million shares of CST common stock, putting the total value the transaction at approximately $85 million.
The deal appears to allow CST to use the tax advantages currently enjoyed by limited partnerships--a benefit that allows it to bid up the multiples of convenience stores in future acquisitions.
CST's former parent company, San Antonio-based Valero Energy Corp., spun its terminal and pipeline assets into an MLP late last year. In its announcement, CST did not comment on any relationships that could have been revived with its former parent, but the pending MLP status does on the surface seem to be a big reason behind the new alliance.
As reported in a 21st Century Smoke/CSP Daily News Flash, CST Brands will acquire the general partner of Lehigh Gas Partners and all the associated incentive distribution rights (IDRs), the units that make up ownership.
The deal creates a sponsor-backed, growth-oriented MLP vehicle and provides CST Brands with a platform for a long-term drop-down strategy for its U.S. wholesale fuel supply business and newly constructed real estate into Lehigh Gas Partners.
Drop-down maneuvers were a big part of the Susser Holdings Corp.-Energy Transfer Partners (ETP) deal in the spring. In that deal, the companies used drop-down transactions to better align common assets, such as combining the c-stores under one managing umbrella within the larger entity.
The transaction's strategic benefits:
- Provides CST Brands access to capital through a growth-oriented MLP vehicle to execute its long-term strategic plan.
- Drop-down asset sales to Lehigh Gas Partners and an expanded set of external opportunities at Lehigh Gas Partners to drive IDR cash flow growth for CST Brands
- Lehigh Gas Partners gains access to a pipeline of drop-down asset acquisitions from CST Brands to fuel future distribution increases.
- Cash flow from asset drop downs and IDRs to provide CST Brands with capital to pursue organic growth opportunities.
- Creates a leading platform in the industry with fuel distribution and retail operations expertise.
- Eliminates upfront costs and market risks of pursuing an MLP initial public offering (IPO) of CST-only assets.
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In addition to Lehigh Gas Partners' growth-through-acquisition strategy, which has been successfully executed since it went public, CST Brands has a strong portfolio of assets that it can offer as drop-down candidates to LGP, including 1.9 billion gallons of annual domestic wholesale fuel volumes, based on CST Brands' 2013 domestic fuel volume, and a portfolio of recently completed new-to-industry (NTI) stores. CST Brands plans to build additional NTI stores each year that will serve as another set of potential drop-down assets. Any future drop-down transactions will be subject to the approval of the independent conflicts committee of the general partner of Lehigh Gas Partners and the CST Brands board.
"The transaction provides both the shareholders of CST Brands and the unit holders of LGP with the benefit of strategic growth options for the future and a symbiotic relationship for stronger growth together," said Kim Bowers, chairman and CEO of CST Brands. "We expect that the transaction will provide us with opportunistic access to the MLP capital markets, the opportunity to grow our U.S. wholesale business and to expand our new-store build program, as well as provide us strategic flexibility in the consolidating fuel and convenience retail industry."
"The transaction provides both for greater certainty of, and an accelerated rate of, future distribution growth of LGP and creates a tremendous platform for future growth in the industry for both CST Brands and LGP, while enhancing both companies' goal of increasing shareholder and unit-holder value," said Joe Topper, chairman and CEO of Lehigh Gas Partners.
Topper will remain president and CEO of Lehigh Gas Partnersand will join the CST Brands board. He and other insiders are not selling any of their limited partner interests in Lehigh Gas Partners in the transaction and will continue to own subordinated and common units representing approximately 44% of the limited partner interests in Lehigh Gas Partners. The transaction overall does not involve the sale or purchase of any of the common or subordinated units of Lehigh Gas Partners, will continue to operate as a separate, publicly-traded MLP and maintain its current headquarters in Allentown, Pa.
The board, which has approved the transaction, also authorized a $200 million share repurchase. The companies expect the deal, which is subject to customary conditions, to close early in fourth-quarter 2014.
Lehigh Gas Partners is a leading wholesale distributor of motor fuels and owner and lessee of real estate used in the retail distribution of motor fuels. Formed in 2012, Lehigh Gas Partners distributes fuel to more than 1,050 locations and owns or leases more than 625 sites in 16 states: Pennsylvania, New Jersey, Ohio, Florida, New York, Massachusetts, Kentucky, New Hampshire, Maine, Tennessee, Maryland, Delaware, West Virginia, Virginia, Illinois and Indiana. The company is affiliated with several major oil brands, including ExxonMobil, BP, Shell, Chevron, Sunoco, Valero, Gulf and CITGO.
CST Brands, based in San Antonio, operates nearly 1,900 locations throughout the southwestern United States and eastern Canada offering a broad array of convenience merchandise, beverages, snacks and fresh food. In the United States, CST Corner Stores proudly sell Valero fuels and signature products such as Fresh Choices baked and packaged goods, U Force energy and sport drinks, Cibolo Mountain coffee, FC Soda and Flavors2Go fountain drinks. In Canada, CST is the exclusive provider of Ultramar fuel and its Dépanneur du Coin and Corner Stores sell signature Transit Café coffee and pastries.
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