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Mergers & Acquisitions

CST Regional ‘Swap’ Puts Focus on Flash Foods

Market exit, deal with 7-Eleven allows company to concentrate on growth areas

SAN ANTONIO -- Following a review of West Coast assets that led to a decision to essentially swap them strategically for previously acquired retail sites in the Southeast, CST Brands Inc. has entered into a definitive agreement to sell store operations in the California and Wyoming markets to 7-Eleven Inc. and its subsidiary, SEI Fuel Services Inc.

The transaction includes 76 stores in California and three stores in Wyoming.

CST will not maintain the wholesale fuel contracts on the divested California and Wyoming stores, Kim Lubel, chairman, president and CEO of CST, said during the company’s first-quarter 2016 earnings call. “We’re doing a full market exit from California and Wyoming,” she said.

As reported in a McLane/CSP Daily News Flash, the purchase price for the transaction is $408 million. The company said it anticipates using the majority of the cash proceeds from the sale to pay down borrowings under CST's $500 million revolving credit facility.

CST undertook a strategic review of the California and Wyoming assets in November 2015.

“These 76 stores included in this network have historically produced strong fuel results, but they consistently under-index on inside-store sales and gross profit dollars, given that their average square foot size is half the average size of our U.S. network,” Kim Lubel, chairman, president and CEO of CST, said at the time. “The small store size significantly inhibits CST's ability to implement our grocery and food expansion programs, which are critical to increasing inside sales gross profits. Moreover, the much smaller average lot size effectively blocks our efforts to expand our store offering through raise-and-rebuild efforts on existing sites.”

CST acquired Waycross, Ga.-based Flash Foods in late 2015. With the review of the West Coast assets, CST decided to “reposition” itself regionally, said Lubel. “We’re looking at exchanging the California marketplace for Georgia and Florida--79 stores for 165 for roughly the same purchase price into a new market where we can expand. … It’s a great swap,” she said.

“We are on track to achieve the synergies we expected to see from the Flash Foods acquisition, where we are already seeing growth in inside sales and fuel gross profit along with a reduction in operating expenses,” Lubel said on the May 6 call. “The Flash Foods acquisition has already given us two NTIs [new-to-industry stores], one each in Georgia and Florida, which opened in April. We have two more planned to open in the Flash Foods markets in 2016.”

She continued, “There was a lot of interest in those assets. Real-estate is a big driver in California. We’ve got great stores and great folks in California, so it’s a combination of a very long-tenured employee base as well real estate that is situated nicely in California. We had a very robust process, and we are very pleased with the outcome and the purchase price we were able to secure. … We’re looking forward to repositioning away from the West Coast and into an area where we can expand further with NTIs.”

The deal is subject to customary closing conditions including possible purchase price adjustments. The companies said they expect the cash deal to close mid-summer 2016.

Raymond James advised CST Brands in the transaction.

With the closing of this transaction, CST expects to realize a tax benefit from the completion of a like-kind exchange strategy with its purchase of Flash Foods.

Dallas-based 7-Eleven declined to comment on the deal. “We have no comment outside the press release at this time,” a spokesperson for 7-Eleven told CSP Daily News.

CST Brands is one of the largest independent retailers of motor fuels and convenience merchandise in North America. Based in San Antonio, it has more than 2,000 locations throughout the Southwestern United States, Georgia, Florida, New York and Eastern Canada. CST also owns the general partner of CrossAmerica Partners LP, a master limited partnership (MLP) and wholesale distributor of fuels based in Allentown, Pa.

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