From a merger-and-acquisition (M&A) perspective, the year 2023 can best be described as a year of small- to medium-sized transactions, following the trend established in 2022.
However, there were a few very large transactions:
- Maverik Inc.’s purchase of Kum & Go
- The acquisitions by Majors Management LLC and Alimentation Couche-Tard Inc. of all of the MAPCO stores from Companie de Petroleos de Chile S.A. (COPEC)
- BP Products North America Inc.’s acquisition of TravelCenters of America Inc.
Still, the vast majority of transactions that closed in 2023 involved 10 to 50 convenience stores. There are several explanations for this. In this first of a two-part report, I’ll run through those reasons, then in part two, I’ll run through the significant deals completed in 2023.
Industry Dynamics
First and foremost, there are simply not that many big chains or portfolios of convenience stores around anymore that might be available for sale. Most of the transactions involving large companies or portfolios of convenience stores took place a few years ago.
Secondly, many operators have been making record earnings in the past couple of years and do not see a compelling reason to sell.
Third, the current economic climate of record high interest rates has had a dampening effect on M&A activity, resulting in a reduced number of potential bidders and downward pressure on the purchase prices that bidders are willing and able to pay.
As discussed in the next section, the current political turmoil in the world and national stages has also had a significant impact on the economy in the United States generally and the convenience-store industry specifically. Notwithstanding the foregoing constraints, there is still a vibrant market for quality c-store assets and companies with strong financial performance that are in desirable markets.
Topline Challenges
Political. National and international political issues have dominated the world stage in the past year. At the international level, the war in Ukraine continues with no end in sight. The conflict between Israel and Hamas, which began in October, has already taken a huge toll in terms of loss of life and physical destruction in the region and only seems to be escalating. At the national level, the inability of Congress to work in a bipartisan manner to advance meaningful and much needed legislation on a number of important issues, including long-term federal budgets, has virtually brought the government to a standstill.
Economic. The COVID pandemic was a monumental event for the United States and the rest of the world, both in terms of human life and economic impact. Fortunately, the U.S. economy was able to survive the economic consequences of the pandemic and is probably stronger than it has been for quite some time. However, the rate of inflation increased at an unacceptable rate, and the Fed decided it needed to cool the economy with a series of interest rate increases. In March of 2022, the Fed funds rate was essentially zero. Over the past two years, the Fed increased the rate 11 times, and it now stands between 5.25% and 5.50%. That is the highest level in two decades. It appears that this strategy has been partially successful, because inflation has eased from its high levels, without a significant increase in unemployment. The Fed announced in December that it would hold rates steady and would likely reduce them at least three times during 2024, probably by one-quarter of a point each time. The high interest rate environment we have experienced in 2023 has had a number of effects on our industry and M&A, which will be discussed further in the section that follows. Furthermore, consumers have seen their disposable income reduced by virtue of inflation and higher costs of credit for everything from home mortgages to auto loans to credit cards. A saving grace in 2023 was the fact that gasoline prices were significantly lower last year than in previous years, with regular gasoline prices under $3 per gallon in many markets.
Industry. Although everyone in the industry wants to talk and fret about electric vehicles (EVs), the concern seems to be somewhat premature. Although our government has talked a great deal about providing tax credits, grants and other incentives for the development of a national system of charging stations on our highways and purchases of EVs, that has not materialized in any significant way as of yet. Until the technology can provide a significantly longer battery life, and people are more motivated to purchase EVs, most Americans will remain enamored with their gasoline-powered automobiles. All of this is certainly a good omen for the convenience-store industry. Other issues that continue to plague the industry are the high cost of labor and the low unemployment rates in most parts of the country. This has been a perennial problem for the industry, although it has seemed to have eased a bit in the last year. Operators are being forced to pay higher wages to recruit and keep employees, and they are having to cope with higher minimum-wage laws and competition with other industries that are offering more favorable wages.
Purchase Price Multiples
Before the pandemic and the Fed’s 11 interest rate increases starting in 2022, it was not unusual to see certain high-quality c-store companies or portfolios sell at double-digit purchase price multiples (based on store-level EBITDA without consideration of corporate general and administrative expenses). This was typically the case for larger chains in desirable markets, with stores in excess of 4,000 square feet and at least 1 acre lots and a quality foodservice program.
Most of the larger deals have already been done, and for a variety of reasons, transactions with double-digit multiple purchase prices are now fewer and far between.
The 5.25% interest rate increases by the Fed over the last two years certainly has been a major factor in M&A activity in 2023. In addition, many of the traditional lenders to the industry have adopted a more conservative approach to underwriting transactions, and they have tended to impose lower advance rates and more stringent financial covenants, … and they have also tended to shy away from new customers.
Even those prospective purchasers who could pay cash to close a deal would invariably factor in the current interest-rate environment in making their offers because they were either utilizing funds from a credit facility to pay for the acquisition, or they would want to put senior debt on the assets at a later date. Consequently, the interest rate hikes have truly affected everyone, although not always at the same time or in the same way.
Although purchase prices and multiples are typically not disclosed in privately negotiated transactions, based on information we have received, we believe that multiples have held up pretty well in 2023 despite the high interest rate environment, and we have seen transactions with high single-digit multiples for quality assets in good markets.
If the Fed continues to pause interest-rate increases and actually reduces them three or more times in 2024, as has been predicted, that should have a positive impact on both M&A activity and purchase price multiples in 2024.
Conclusion
Most of the owners of larger chains that were interested in selling did so prior to the pandemic, and the current economic climate, together with interest rates that we haven’t seen in two decades, has contributed to the smaller, and fewer, deals that we witnessed last year.
In addition, operators were generally happy with the financial performance of their companies and were in no hurry to look for an exit. As a result, many operators who were willing to consider selling their companies backed away because they had unrealistic price expectations.
Fuel volumes have generally bounced back from the COVID lows and fuel margins have remained relatively stable as well, although we have observed reduced fuel margin trends recently in certain markets.
We believe that multiples have held up pretty well in 2023 despite the high interest rate environment.
Notwithstanding all of the challenges described herein, based on the transactions we either worked on or that were completed in 2023, whether M&A or divestiture engagements, we are convinced that there is still intense interest in acquiring quality companies, portfolios and individual convenience stores, and there are substantially more buyers than sellers.
In addition, there are a number of private equity players, either individually or through joint ventures with operating companies, who continue to show keen interest in making acquisitions in the industry. Hopefully, if interest rates decrease significantly in 2024, that should have an extremely positive effect on the industry as a whole and M&A activity in particular.
Many operators who have been sitting on the sidelines for a variety of reasons may very well decide that it is time to move forward in a different direction—either to grow more rapidly or exit the business. In either event, 2024 should prove to be an interesting year.
Dennis L. Ruben is executive managing director of NRC Realty & Capital Advisors LLC, Chicago. Reach him at dennis.ruben@nrc.com.