Mergers & Acquisitions

Top 202: Chain Growth Proves Essential

Industry consolidation and new builds continue despite a global pandemic

CHICAGO — Like most things, the 2021 Top 202 Convenience Store Chains list may have looked very different had it not been for the coronavirus.

7--Eleven Inc., Alimentation Couche-Tard Inc. and Speedway LLC—the top three c-store chains by U.S. store count—were all part of merger and acquisition talks that faltered in 2020 due to the COVID-19 pandemic.

Early in 2020, 7-Eleven was reported to be the likely winner of a bidding war for Marathon Petroleum’s more than 3,900 Speedway stores. By July, however, after parent company Seven & i dropped a $22 billion bid citing the pandemic as a complicating factor, Couche-Tard was said to be leading the race, reportedly prepared to divest 1,250 stores to seal the deal, only to have 7-Eleven Inc. steal it away in August for $21 billion.

Following Federal Trade Commission delays and divestments, Irving, Texas-based 7-Eleven closed on its acquisition of the Enon, Ohio-based Speedway retail network May 14. Meanwhile, Couche-Tard Inc., Laval, Quebec, turned its attention overseas, making bids for Caltex Australia Ltd.’s 1,900 c-stores and eyeing Spanish energy producer Repsol SA, which owns more than 4,850 gas stations and c-stores in five countries outside of the United States.

While some of the potentially biggest deals in industry history were halted due to uncertainty at the start of the pandemic, a quick comparison of the Top 202 Convenience Stores list from 2020 to 2021 shows that for many c-store chains, growth did not halt due to COVID-19 complications. After a slowdown in the second quarter, the second half of the year made up for any lost time.

Delayed Satisfaction

“While some deals may have been delayed at the outset of the pandemic, M&A activity continued at a solid pace throughout 2020 and remains very active today,” says Roger Woodman, managing director of Raymond James & Associations Inc., St. Petersburg, Fla.

Refuel Operating Co. LLC, Mount Pleasant, S.C., for example, shot up from No. 186 to No. 64 on CSP’s list as it more than tripled its store count, mostly through acquisitions.

Meanwhile, stalwart chains such as RaceTrac, QuikTrip, Sheetz, Wawa, Kum & Go and Kwik Trip continued to grow organically.

Kwik Trip, No. 12 on the Top 202, aims to grow by about 50 stores each year, mostly through new builds. In 2020, it exceeded its typical goal, growing by 67 stores, most prominently through its acquisition of 36 Stop-N-Go c-stores in December.

Related: 5 Top 202 Retailer Profiles

COVID-19 didn’t change M&A goals much for the La Crosse, Wis.-based chain, John McHugh, director of corporate communications, says, although it did delay some of its new builds.

“We delayed some of our ground-up stores till this year,” he says. “And that decision was made back in March last year. We had no idea what was going to happen financially. In retrospect, I think we would’ve been able to carry forward on those build projects, but you’d rather be safe than sorry.”

More than a year later, McHugh says COVID-19 confirmed that Kwik Trip’s new generation store, at more than 9,000 square feet, is the right model to follow.

“We’re trying to get the best stores we can.”

“One of the things we’ve learned over the pandemic is our business model is very successful in terms of, people wanted commodities: eggs, milk, bread and butter,” he says. “Because we’re vertically integrated, we didn’t have to worry about out-of-stocks. We were just able to crank up more production if we needed more bread or whatever.”

Kwik Trip also ramped up its foodservice over the pandemic by adding fresh, fried chicken to its stores and take-home meal kits. To do that though, the chain needs stores with large kitchens, which is why it opts for organic growth over acquisitions.

And as a result, almost half of the Stop-N-Go stores it acquired were too small to be rightly rebranded as Kwik Trip stores, McHugh says. So what made KT pursue that chain as an acquisition?

“It’s also a defensive move, so somebody else doesn’t come in,” McHugh says. “And No. 2, it allows us to get into some places where there’s already a building there, so it makes the permitting process a little easier.”

In 2021, in addition to finishing up a couple new builds that were delayed by COVID-19, McHugh says Kwik Trip will stick to its plan of averaging 40 ground-up stores and 10 rebuilds. If the right opportunity comes up for an acquisition, though, expect KT to jump on that, too.

Refuel Review

Acquisitions are the primary growth mode for the Refuel c-store chain, which President and CEO Mark Jordan founded in 2010, with a plan to grow fast. Backed by private-equity firm First Reserve, Refuel reached a store count of 33 by the end of 2019 and acquired two venerable midsized chains—Double Quick (48 stores) and Cruizers (26 stores)—in 2020. And while not included in its store count for the 2021 Top 202 list, Refuel announced in May it entered into an agreement to acquire the assets of Wag-A-Bag LLC, which owns and operates 16 c-stores in the Austin, Texas, market.

Making acquisitions has always been part of Refuel’s growth plan, Jordan says. COVID-19 has only reinforced the way he thinks about growth.

“It’s always been a great business; it seems like it’s more fun every day,” Jordan says of the c-store industry. “It’s harder to run during coronavirus, and there’s some markets that didn’t do as well, that’s for sure. We’re in markets that did well.”

Jordan says the Southeast shut down less than other states amid the pandemic, allowing Refuel to serve customers when so many other businesses were closed. And while his acquisition strategy will hold, he’s still careful about M&A decisions.

“We’re just going to keep on doing what we’ve been doing,” Jordan says on plans for 2021 and beyond. “It wouldn’t surprise me if we were very, very active this year. And it wouldn’t surprise me if we only get a few small deals done because we’re not in it for store count. We’re trying to get the best stores we can.”

Keeping Pace

Many c-stores benefited from being deemed essential businesses, a designation that allowed operators to largely remain open throughout 2020 and avoid the trauma and financial distress experienced by other retail channels and full-service restaurants, Woodman says.

Similarly, the pace of M&A generally remained consistent following an initial pause. “Deal activity never really slowed down,” says Woodman of Raymond James.

C-stores in large part earned record profits during the pandemic, Woodman says. Heading into the pandemic, c-store assets were trading at record levels relative to historical norms, and as the COVID-19 pandemic abates, Woodman believes c-stores will remain well positioned from a valuation perspective.

“The M&A market window remains open given the continued low-interest-rate environment, availability of debt and equity capital, and the tremendous cash flow generated by retailers last year,” Woodman says. ‘Strong valuations today, uncertainty about the future after tax proceeds and uncertainty about when this current economic cycle will end are driving many operators to sell.”

“There’s really not a better time for somebody to sell if they’re on the fence or have been thinking about it.”

Indeed, CSP registered 19 significant chain selloffs in 2020.

Dennis Ruben, executive managing director of NRC Realty & Capital Advisors, Scottsdale, Ariz., expects that trend to continue.

“There’s really not a better time for somebody to sell if they’re on the fence or have been thinking about it,” Ruben says, adding there’s more demand than there is supply of c-stores.

That being said, some Raymond James & Associate’s clients are excited about the prospects for the industry and investing in new stores and building for the future, Woodman says.

To compete effectively in the future and cater to changing consumer preferences, though, operators must make the appropriate investment in technology, infrastructure, loyalty programs and foodservice, Woodman says. This requires significant capital and is not without risk.

“For example, we spend a lot of time speaking with investors about the inevitable transition to electric mobility and decarbonized fueling,” Woodman says. “While we think this creates a tremendous opportunity for the industry overall, most smaller operators lack the scale, lot configuration and capital to implement a successful electric charging program. The inability to evolve and invest in the future will drive more companies to exit the industry.”

Refuel is one of those businesses looking to invest in the future.

The company is looking at ways to add features like solar panels and EV charging stations to its stores. Jordan says those in the company often say they’re on “Refuel time,” meaning things are moving so fast.

“We joke about Refuel time a lot because 4,000 things are going on at one time, and it just seems like it’s never been busier in my life,” Jordan says.

Crystal Ball

While Woodman says he is very confident that today’s M&A market is very healthy, he’s hesitant to predict what that’s going to look like a year or two years from now.

“We all know that the economy cycles,” he says. “And we’ve been in a very extended long-term economic upcycle. The pandemic obviously caused a recession that was fairly short-lived and didn’t really impact the convenience-store industry. So we’re still in this up economic cycle, and it’s going to end at some point, but no one can predict exactly when that is.”

When that time does come, and capital is no longer available to fund M&A, it’s going to negatively impact valuation across all markets, including c-stores, Woodman says. But one thing 2020 proved is the staying power of convenience retailing, Ruben says.

“The industry is very resilient, and it’s certainly recession-resistant and seems to weather most storms,” he says.

“The pandemic obviously caused a recession that was fairly short-lived and didn’t really impact the convenience-store industry.”

What Ruben predicts will continue to happen over the near future is c-stores will consolidate and rationalize their portfolios.

“In the next year or so—and it’s kind of already started—you’re going to see portfolio rationalization. A lot of these companies bought big companies and tried to assimilate all of [the stores] and they’re not all going to work.” Ruben uses NRC’s work with Circle K to sell more than 250 stores in the United States as one example of portfolio rationalization in the industry.

But the buyers are there. He describes the number of people who have had to sign a confidentiality agreement around the Circle K deal as “staggering.”

“With all the demand for smaller portfolios or small groups of stores, I think somebody can improve their balance sheets significantly by rationalizing their portfolio. Everybody should look at that probably once a year to see what works and what doesn’t work,” says Ruben.

Portfolio rationalization could be an opportunity for smaller chains to participate in the M&A market, says Ruben.

He predicts that larger companies will be less likely to bid on smaller groups of stores, creating an opportunity for smaller players in the market.

Ruben says many smaller c-store chains looking to grow were unable to participate in larger acquisitions because they did not have the bandwidth or the financial resources. Furthermore, he says, multiples—the financial metrics used to value companies—are so high that many buyers writing the check have had to rely on internal resources or lines of credit to afford the purchase.

“The irony for the small to midsize guys who want to grow through acquisitions is they probably can’t compete in the bidding scenario with the large players because unless they just have a ton of money laying around, they’re going to have to finance it. And if they finance it, they’re going to have to go get appraisals. And banks typically will only loan maybe 75% or 80% of appraised value. So, when you do the math on some of these deals, you’re going to have to come up with a whole lot of equity to make these deals work,” says Ruben.

Additionally, there are even more hurdles for smaller companies looking to buy, he says.

For instance, smaller companies might need financing while larger firms can simply write a check. A buyer that relies on financing is riskier, and that is one reason why many smaller players have been cut out of the c-store M&A market.

“As a result of that, it’s been harder for them to grow. And that’s why it probably has made more sense to those guys to figure, ‘If you can’t be a buyer, maybe you should be a seller,’ ” says Ruben.

The other option is growing organically.

“But that’s kind of a crapshoot if you think about it. Just because you think you found a good corner doesn’t mean it’s going to be successful. The big companies can take that risk. The smaller guys, it’s a little harder,” Ruben says.

As a result, outside capital will influence M&A in the industry in the next year, Ruben says. “There are a ton of new sources of capital that want to come into this industry,” he says, especially private-equity firms. Ruben reports a “flood” of phone calls over the past year or so from private-equity firms looking to buy portfolios of stores either with or without an operator built in.

“There are a lot of people with tons of money looking for the right opportunity,” says Ruben. “We’ll see how that plays out in the next year or so. There’ll be a lot more names you’ll see that you haven’t seen before that are buying some of this stuff.”

Click here to view the complete 2021 Top 202 report.

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