Mergers & Acquisitions

Race for Speedway Pits Couche-Tard Against 7-Eleven

Analyst sees price as biggest hurdle, despite divestments
Photograph: Shutterstock

LAVAL, Quebec —Recent reports suggest Alimentation Couche-Tard is a front runner to acquire the Speedway chain of convenience stores from Marathon Petroleum Corp., but don’t count out 7-Eleven as a possible buyer, says a retail analyst.

Couche-Tard is preparing to divest 1,250 convenience stores to avoid antitrust concerns as a condition to acquire the retail network from Marathon Petroleum, The New York Post reported. Any divestment by Couche-Tard would be contingent on a deal to buy all of Enon, Ohio-based Speedway LLC’s 3,900 locations, it said.

Laval, Quebec-based Couche-Tard’s U.S. and Canadian retail network consists of about 9,900 c-stores, approximately 6,000 in 48 U.S. states under the Circle K and Holiday Stationstores banners, and the rest in all 10 provinces in Canada under the Circle K and Couche-Tard banners.

Although Findlay, Ohio-based Marathon Petroleum is moving ahead with its 2019 plan to spin off Speedway into an independent, publicly traded company, it is also exploring a sale. It has attracted several major buyers, including Seven & i Holdings Co. Ltd., the Tokyo-based parent of 7-Eleven Inc., Irving, Texas, and Blackburn, U.K.-based c-store retailer EG Group, which through EG America LLC owns the Westborough, Mass.-based Cumberland Farms c-store chain.

In March, Seven & i dropped a bid to acquire Speedway for approximately $22 billion, citing the high price and the COVID-19 pandemic. 7-Eleven, with close to 9,400 stores, is No. 1 on CSP’s 2020 Top 202 ranking of U.S. c-store chains by size. Couche-Tard is No. 2; Speedway is No. 3; and EG America, with nearly 1,700 stores, is No. 5.

A mid-June report in the Wall Street Journal said Marathon Petroleum has returned to the negotiating table, this time with Couche-Tard. Couche-Tard would not comment on a deal.

Analysts Weigh In

Analysts at London-based investment bank Barclays estimated that Couche-Tard may have to divest 1,036 Speedway stores in a merger if the Federal Trade Commission (FTC) forbids it from owning more than 35% of the stations in any given market, according to the newspaper.

In Minneapolis, there are 223 Holiday Stationstores and 80 Speedways, making 80% of the local market, according to Barclays. The concentration is similar in other cities including Cincinnati, Detroit and Tucson, Ariz., it said.

The divested stores would certainly attract interest, Chris Li, analyst with financial services company Desjardins Securities, Montreal, said in a research note. “We believe there would be interested buyers, including some of the large operators—EG Group and 7-Eleven—and regional c-store chains. Raising $4 billion from store divestitures would help overcome a couple of major hurdles—the large equity raise and antitrust concerns; however, the biggest hurdle is still the price. We believe significant tax leakage triggered by the sale and the presence of other potential bidders … could make this an expensive deal.

“Market uncertainty due to COVID-19 is another challenge," Li wrote. “While we believe Speedway would be a highly strategic and synergistic asset for [Couche-Tard], we expect management to exercise financial discipline and not overpay.”

Li said that while the divestment increases the likelihood of Couche-Tard acquiring Speedway, “an agreement on price is still the biggest challenge and, hence, we continue to view the likelihood as low.”

Even without Speedway, “we believe [Couche-Tard] has a clear path to doubling EBITDA over the next three to four years, supported by various sales and margin growth opportunities and by market share gains as COVID-19 further weakens the smaller players and M&A,” he said.

“Assuming 7-Eleven is interested in Speedway at a lower price, we believe it has the financial capacity to execute a deal,” Li said in a separate note. “We estimate the remaining funding gap could be met with a combination of store divestitures and sale leasebacks. We believe some store divestitures will be required to satisfy antitrust concerns. … When 7-Eleven acquired Sunoco for approximately $3 billion, it raised $900 million from sale leasebacks.

Meanwhile, EG Group “is unlikely to be an aggressive bidder due to its high debt load,” he said.

The Spinoff Option

Ken Shriber, managing director and CEO of Petroleum Equity Group, Chappaqua, N.Y., still believes that for Marathon Petroleum, “the best way to monetize the Speedway assets for the benefit of shareholders is to spin off the company.”

Unlike Valero Energy Corp.’s spinoff of the approximately 1,900-store CST Brands in late 2012, with Speedway, “there is enough critical mass with approximately 4,000 sites and strong management to further grow the company. Many sites can be rebuilt with larger store footprints and foodservice, which provides for a significant earnings upside,” he told CSP Daily News. But Couche-Tard, which acquired CST in mid-2017, also “realizes the potential of [the Speedway] acquisition,” Shriber said.

“What Couche-Tard is doing with the Speedway acquisition is a great idea,” Terry Monroe, founder and president of American Business Brokers & Advisors, Effingham, Ill., told CSP Daily News. “Couche-Tard is in the process of creating a national chain of convenience stores and a national brand under Circle K. The synergies between the two companies will be tremendous, and so will the opportunities to reduce costs of products and the selling of private-label products on a national scale.”

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