The Return of the Activist Investor: Will History Repeat Itself?

CHICAGO — Delek U.S. Holdings is resisting a call by Carl Icahn’s CVR Energy, a majority shareholder, to sell its more than 250 convenience stores. In a Jan. 14 letter, the activist investor suggested that the company’s stock is undervalued and that it could benefit from selling the retail network.

The move is the latest in a series of activist-investor pushes for change by publicly owned c-store chains that has driven dramatic changes for companies such as The Pantry, CST Brands and Speedway, or which has been a line in the sand for companies such as Casey’s.

Will history repeat itself? And which way? While the story is still unfolding, here’s a look at Delek’s dilemma and the role that activist investors have played in the c-store industry. …

In March 2020, Icahn Enterprises, New York, and its Sugar Land, Texas-based CVR Energy subsidiary announced that they had purchased 14.86% of the outstanding shares of Delek U.S., reportedly ahead of a possible acquisition. To prevent a hostile takeover, Delek U.S. adopted a “poison pill” shareholder rights agreement.

But CVR Energy changed its strategy. “When we first started acquiring our position in Delek, we believed the stock was undervalued and thought the company could present a good synergistic acquisition opportunity for CVR,” CVR Energy President and CEO David Lamp said in the letter to Delek U.S. Chairman, CEO and President Uzi Yemin. “However, due to the dramatic changes in the industry since that time, we believe we would achieve significantly greater results for our shareholders by devoting capital to internal higher return projects.”

To do that, CVR has proposed that Delek U.S.:

• Cease operations at the Krotz Springs, Texas, and El Dorado, Ark., refineries and convert them for other purposes.
• Cease dropping down core refining assets into Delek Logistics at “value-destroying” prices.
• Sell Delek U.S.’s retail business at current high prices while retaining wholesale marketing.
• Exit noncore supply and trading activities and discontinue activities that add no value to the core refining business.
• Simplify Delek U.S.’s corporate structure and reduce general and administrative expenses.

In response, Delek U.S. issued a statement largely rejecting CVR Energy’s requests. “Under the leadership of an engaged and experienced board and management team, Delek U.S. has built a broad portfolio of integrated assets in strategically important geographies, providing substantial value for its customers and partners,” the company said. “While Delek U.S.'s immediate focus is navigating current market volatility, the company will continue to execute a long-term strategic plan of providing significant value to shareholders through disciplined capital allocation practices.”

CVR wants to replace three members of Delek’s board with independent nominees. “We believe our nominees would offer a fresh perspective, and that their extensive industry experience would help to realign Delek’s operating and capital decisions and overall strategy to better fit today’s refining and business environments,” it said.

CVR Energy’s nominees—all with refining, supply and marketing experience—include Robert Kent Jr., president of REK Energy, previously with Sinclair and CITGO; George Damiris, board member at Eagle Materials Inc., previously with HollyFrontier; and Randall Balhorn, vice president of business development at U.S. Development Group.

Delek U.S. said its board includes seven “highly qualified directors, six of whom are independent and all of whom are established industry leaders with deep expertise and experience that align with the company's long-term strategy.”

Meanwhile, Delek U.S. says it is evaluating CVR’s nominees. “Delek U.S. encourages input and engagement from all investors and looks forward to an ongoing dialogue with all shareholders, including CVR, as the company continues to execute value creation strategies,” it said. “Delek U.S. is committed to maintaining a strong, independent and diverse board that serves the best interests of its shareholders, employees, customers and partners and regularly reviews opportunities to create and deliver value.”

The retail history of Delek U.S. is one of acquisition and consolidation, but with a twist. Brentwood, Tenn.-based Delek U.S.—with assets in petroleum refining, logistics, renewable fuels, as well as in convenience retailing and wholesaling—is No. 32 on CSP’s Top 40 Update to its annual Top 202 ranking of U.S. c-store chains by company-owned store count.

In 2001, Delek U.S. acquired 198 MAPCO c-stores from The Williams Cos., Tulsa, and it has since grown through a series of sizeable acquisitions. But in 2016, it flipped the script and divested its retail portfolio, selling 350 MAPCO Express and other c-stores to Compania de Petroleos de Chile (COPEC), Santiago, for $535 million.

Seven months after that zig, the company zagged, taking ownership of Dallas-based Alon USA Energy and its Southwest Convenience Stores subsidiary. With that deal, it became the largest U.S. 7-Eleven licensee, operating 280 c-stores in Texas and New Mexico. In 2019, the companies agreed to exit a long-term c-store licensing agreement as Delek plans to grow its retail footprint into additional markets supplied through its four refineries and pipelines, according to Tony Miller, executive vice president of Delek U.S. and president of Southwest Convenience Stores.

Delek U.S. will remove all 7-Eleven branding by Dec. 31, 2021 and has since launched DK, a proprietary c-store concept, to replace the 7-Eleven brand. It opened the first DK store in Midland, Texas, in February 2019.

Activist investors have been successful at influencing major strategic actions in the industry in the last few years, according to Recent Shareholder Activism in the U.S. Convenience Store Industry, a recent report by Raymond James Financial, St. Petersburg, Fla.

“Activists are a factor with all public companies, not just convenience-store companies,” says Roger Woodman, managing director at Raymond James. “Seems like they become more active when M&A valuations rise and an individual company’s trading price remains low. [As a result], a shareholder would suggest unlocking value.”

According to then report, “roughly one-half of activist campaigns result in a significant corporate event within three years of launch, and of those cases, roughly half of the corporate events occurred within one year,” the report said.

Here are a few major examples:

• The Pantry. In 2014, JCP Investment Management and Lone Star Value Management nominated three candidates to the The Pantry's board and argued the chain of about 1,200 Kangaroo Express stores was underperforming and undervalued. The nominees were elected, and in December 2014, Alimentation Couche-Tard, Laval, Quebec, acquired The Pantry, Cary, N.C., for $860 million.
• CST Brands. In 2015, Engine Capital expressed concerns about CST Brands, San Antonio, over the 1,900-store chain's stock price since its spinoff from Valero. After another investor, JCP Investment Management, said it would nominate new directors to force the issue, CST Brands agreed to evaluate strategic alternatives. In August 2016, Couche-Tard acquired CST for $4.4 billion.
• Speedway. In 2016, Elliott Management recommended Marathon Petroleum, Findlay, Ohio, take specific actions to add value, including spinning off its 2,750-store Speedway c-store chain. Three years later, Elliott called for the company to be split into three independent businesses: refining, midstream and retail. After a review, Marathon chose in August 2020 to sell Speedway to 7-Eleven Inc., Irving, Texas for $21 billion. The deal is set to close in first-quarter 2021.
• Casey’s General Stores. In 2018, three investors, including JCP Investment Management, suggested Casey’s General Stores, Ankeny, Iowa, was undervalued and urged it to explore strategic alternatives, including a sale. Casey’s, a chain of more than 2,000 stores, outlined a strategy to increase profitability and enhance performance and appointed three new independent directors, but the investor actions did not lead to a sale.