SCOTTSDALE, Ariz. —Merger and acquisition (M&A) activity in convenience stores was fairly active in 2021—not as much as in years before the COVID-19 pandemic—but active, nonetheless.
The biggest story was 7-Eleven Inc.’s acquisition of the Speedway chain from Marathon Petroleum. Based on the stated purchase price of $21 billion and the pre-closing EBITDA (earnings before interest, taxes, depreciation and amortization) of $1.5 billion, that would equate to a purchase-price multiple of 14x. Taking into consideration synergies of the combination, tax savings and sale-leaseback transactions, the “effective” purchase-price multiple on the deal was more like 7.1x.
Another notable transaction was Casey’s General Stores’ acquisition of Buchanan Energy for a net investment of $500 million. According to published reports, Casey’s paid a 10.6x multiple for Buchanan Energy.
- Click here for a list of 20 of the most significant c-store transactions of 2021.
Most of the other transactions that were completed in 2021 were private and, therefore, purchase prices and multiples were not reported. However, the trends we have observed support the notion that multiples have remained relatively strong in 2021, notwithstanding the headwinds that the industry has faced. On relatively small to mid-size transactions, it is common to see multiples—based on store-level EBITDA for the previous 12-month period—in the high single digits. For the larger transactions, double digit to mid-teen multiples have not been unusual.
The COVID Effect
The recurring theme for the c-store industry is that it is incredibly resilient. During the worst part of the pandemic, when many businesses were closed and people were told to stay home, convenience stores were considered “essential businesses” and allowed to remain open. As a result, most of them thrived during that period.
On the other hand, the restaurant industry in general suffered badly during the same period. Many buffet-style restaurants closed permanently, as did many fine-dining restaurants that could not survive long-term closures. Meanwhile, restaurants such as quick service restaurants and pizza chains, which offer menu items similar to those offered in most convenience stores, fared well.
Although many M&A deals that were in the pipeline during the worst part of the pandemic were either put on hold or abandoned altogether, activity started to pick up again in the fall of 2020 and continued throughout 2021. Nonetheless, the industry has faced and continues to face many challenges and headwinds that will continue to affect company performance and M&A activity and purchase price multiples for the foreseeable future.
The COVID pandemic has taken a tremendous toll in terms of human life and the adverse effects on the U.S. economy. Shutdown orders, vaccination mandates and other government-imposed regulations and requirements made it much more difficult to conduct business, and many of those requirements are still present.
As it relates to c-stores, operators were forced to pay higher hourly wages to obtain and keep employees during the worst part of the pandemic. Some also paid “stay bonuses.” Those increased labor costs have continued to plague the industry. Furthermore, operators were forced to spend significant sums for personal protection equipment at stores, such as plexiglass partitions, masks for employees and hand sanitizer for employees and customers. Those costs have not been insignificant and will likely continue for some period of time.
Other Challenges
Labor Shortages. Related to the pandemic, most operators we know have had a great deal of difficulty getting and keeping employees, even when they offer signing bonuses. There are several factors at work here. Unemployment rates have been at extremely low levels in most states. Furthermore, the unemployment benefits paid to individuals during the height of COVID may have provided some disincentive to work. A portion of the workforce believed that it could make more money by staying home than by working, which only served to exacerbate the problem.
Supply Chain Issues. Many operators have told us that they have experienced and continue to experience severe supply chain issues from suppliers. We have heard reports of shortages of energy drinks, soft drinks, hot dogs, paper and plastic products, and various items normally provided by the major food suppliers. This has resulted in empty shelves in many instances. Of course, sales cannot be realized on missing items and, as a result, profit has been affected. Furthermore, where shortages persist for sustained periods of time, they will certainly have an adverse effect on EBITDA totals and resulting purchase-price multiples.
The Future of EV. Everyone in the industry talks about electric vehicles (EVs) and their potential effect on it. More and more automobile manufacturers are increasing their production of electric vehicles and models. In addition, charging stations are popping up everywhere: in shopping-center and office-building parking lots and elsewhere. Some c-store retailers have added them, but not to any great degree. In December, it was announced that a coalition of electric companies has formed to support the creation of an EV charging network throughout the country. Furthermore, the Infrastructure Investment and Jobs Act currently pending in Congress would allocate funds to research incentivizing large-scale production and consumer adoption of electric vehicles, supported by a $7.5 billion commitment to add 500,000 electric vehicle stations to the national grid. The forces behind EVs are significant and will certainly have a major impact on the convenience-store industry in the future. Operators will need to determine the best way to respond to this challenge. Adding charging stations at stores may be one solution, but this option has its own challenges too. Current charge times for an electric vehicle are 30 minutes or more, and it does not seem likely that the typical c-store customer will be willing to wait around while his or her vehicle is charging. Once charging times are significantly reduced, this should be less of an issue.
Conclusion
Although there was a fair amount of merger and acquisition activity in 2021, most of the companies being acquired were small to mid-size companies. Furthermore, many of the larger companies in the industry have already been acquired, and the remaining ones do not seem interested in a sale transaction in the foreseeable future. However, with the ongoing consolidation of the convenience-store industry into a handful of players, it seems likely that we will continue to see sales of smaller and mid-size companies.
More importantly, as more and more operators witness firsthand the effects of the economies of scale that the larger players are able to realize, as well as the difficulty in competing with them, while also battling the broader industry headwinds they are facing, many operators may very well conclude that a sale in the current economic climate is the right thing to do, especially since interest rates have been at historic lows, debt and equity capital is plentiful, and purchase price multiples remain at record highs.
Dennis L. Ruben is executive managing director and Jacob Johnson is vice president of NRC Realty & Capital Advisors LLC, Chicago. Reach Ruben at dennis.ruben@nrc.com.