Mergers & Acquisitions

Should Casey’s Be Sold?

Activist investors push c-store chain’s board to explore strategic alternatives

ANKENY, Iowa -- Casey's General Stores Inc. could be the next major convenience-store chain to go up for sale if a group of activist shareholders gets its way.

In an open letter to all Casey's shareholders dated Jan. 3, James C. Pappas, managing member of investment firm JCP Investment Management LLC, Houston, suggested that the chain is “significantly undervalued” and urged the board to “immediately engage a financial adviser to explore all strategic alternatives, including a potential sale, merger or similar transaction in order to maximize shareholder value.”

Ankeny, Iowa-based Casey’s, which operates more than 2,000 c-stores in 15 states, has not responded to a request for comment on the letter as of posting time.

"Casey’s has been in the sights of takeover companies before, most notably the failed attempts by Alimentation Couche-Tard (Circle K) and 7-Eleven in 2010. Retail-gas and convenience-store assets remain highly attractive to consolidators, and with Casey’s being [one of] the last publicly held large gas and c-store chains available, the actions of JCP are not unexpected,” Ken Shriber, managing director and CEO of Petroleum Equity Group, Chappaqua, N.Y., told CSP Daily News. “And with recent earnings misses by Casey’s and their limited unit growth, combined with JCP’s recent activist success with CST Brands, shareholders may now be more open to consider a sale."

Pappas represents JCP Investment Management LLC, BLR Partners LP and Joshua E. Schechter, who collectively own about $45 million worth of Casey's General Stores Inc. common stock. JCP was instrumental in the sale of The Pantry Inc. to Laval, Quebec-based c-store company Alimentation Couche-Tard Inc. in 2014 and as part of a settlement agreement with San Antonio-based c-store company CST Brands Inc., which resulted in a sale to Couche-Tard in 2016.

“We believe Casey's shares are significantly undervalued as they do not reflect the true earnings power and full real estate value of the company's irreplaceable fleet of 2,000-plus stores,” the groups said in its letter. “We have previously engaged with management regarding our concerns with the company's returns on invested capital and capital allocation.

"Casey's no longer delivers best-in-class returns as measured by either operating metrics or share price performance. Casey's has missed earnings targets for seven straight quarters due in part to decelerating same-store sales and bloated operational expenses.”

The letter said that Casey's has “significantly underperformed the industry leader, Alimentation Couche-Tard Inc., since Casey's rejected Couche-Tard’s takeover bid.

The letter also claims that Casey’s has expanded too rapidly.

“We are concerned that Casey's store-level returns on invested capital have declined as the company has gone from operating in nine states to 15 states,” it said. “We believe such rapid expansion coupled with seeming declining returns on invested capital is symptomatic of a company that has been unable to manage growth effectively.”

And more growth is on the way. Casey’s opened its second distribution center, in Terre Haute, Ind., in early 2016 and is planning a third facility.

Shares of Casey’s were trading just below $121 at midday on Jan. 3. It's 52-week high was $124.81 on Dec. 8, 2017. Based on recent c-store industry transaction multiples, JCP believes Casey’s shares “could be worth from $150 to greater than $170 per share to a potential acquirer … given the significant synergies and real-estate value that Casey's offers.”

Concluding that a strategic review that could lead to a sale is necessary, the letter says that “the gap between Casey's current share price and its strategic value is significant. We do not believe that waiting for an increase in share price in the face of significant declining EBITDA is the prudent path to take.”


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