To listen to those in the thick of buying and selling convenience stores today, the pumps-and-canopy box is a living entity, a fluid force with the potential for bounty in a time of prolonged recession.
At the sunset of an unprecedented major-oil retail selloff, Roger Woodman of Morgan Keegan describes the rarity of a high-volume asset much like a golden-egg-laying goose that large “strategic buyers” must now compete for. Tom Kelso of Matrix Capital Markets Group Inc. says the life of a c-store is a cycle of shifting populations, cash flow and buyer-seller expectations that, like ripening fruit, must be sold at its ascent, not its decline. Then Sam Susser of Susser Holdings Corp. talks as if the store were a river of incremental sales, a cornucopia of unlimited potential and ever-increasing same-store profit.
This passion for convenience retail is driving what may be considered one of the industry’s most robust expansion periods in decades, involving some of the channel’s best-known names. 7-Eleven is in the midst of what it says will be its biggest store growth year since 1986. Consummate acquirer Alimentation Couche-Tard and its Circle K brand are finding locations in the company’s sweet spot of “quality stores at a fair price.” And Casey’s General Stores is working hard to maintain shareholder value with modest but thoughtful deals
Discussions with more than a dozen sources on the state of mergers and acquisitions within the channel quickly zero in on store counts, valuations and the competitive landscape, with several newly announced purchases peppering the wires all summer. (See chart, above.) But ultimately the latest round of retail selloffs is a test of wills, as business paradigms— from foodservice-rich regional players to fuel distributors with expansive dealer networks—evolve and strengthen.
“People are looking to improve business models, refi ne business models,” says Kelso of Baltimore-based Matrix Capital. “Some may [even] go back to old models that tie supply more closely to [retail].”
Recently, buyers for ExxonMobil properties in Southern California, Texas and Louisiana came to light. But earlier in the year, bidding battles in Chicago for sites held in bankruptcy made headlines, as did news of regional players claiming new markets and others who assembled credit facilities and are ready to “aggressively” re-enter the buyer’s market.
Obviously, the underlying motive is growth. Whether it’s better economies of scale, a push into new markets or investor pressure, central to the current window of change is the need for sustained growth. Influencing the outcome of all this activity are several developing trends:
- Big consolidators taking the Upper Hand. With fi nancial facilities in place and cash on hand, the household names, chief among them 7-Eleven and Circle K, have been making moves and winning bids.
- Investor Action. With the industry proving its resilience during the recession, c-stores are becoming an attractive place for investors to park their money, with numerous platforms already in place in the Northeast and Midwest actively scouting for new deals.
- Higher valuations. Though not as high as pre-recession 2007, sources say valuations are moving back in some markets to above 6x, with evaporating major-oil packages stoking the heat..
- Cheap Money. Continuing low interest rates lure buyers, but they favor those who can invert the equation to outbid their competitors.
- Willing lenders. The lending community appears to be loosening up, offering better debt ratios for stores as well as for sale-leasebacks.
- Market rebound. With those higher valuations, more chains and jobbers who have been sitting on the sidelines, waiting out the recession, may be ready to make a deal.
- Defensive Buying. In some instances, buyers are considering purchases not as an opportunity for growth but to lock out competitors.
- Healthy Assets coming to Market. With competitive pressure from both consolidators and regional titans, midsize chains may find it harder to compete, potentially putting lucrative, high-volume assets on the market.
Assessing the overall situation, Woodman of the Memphis, Tenn.-based Morgan Keegan says, “We see an oversupply of below-average assets and real demand for higher-quality assets.” Such metrics are encouraging at both ends, with an increase in the independent dealer segment and continued growth for consolidators.
For both new and ongoing bargaining, price will undoubtedly make the difference. Jeff Turpin, chairman and CEO of VPS Convenience Store Group, Wilmington, N.C., says lower lending rates for sale-leasebacks, for instance, help his chain. “We’re active in the sale-leaseback market,” he says. “So a lower rate for us lowers our break-even rate at the store.”
“With c-stores, everything will make sense for the right price,” says Dennis Ruben, managing director of NRC Realty & Capital Advisors, Chicago.
Rising Valuations
So where have prices been going? Though tides are rising, Ruben cautions sellers. “Valuations are very good across the board, but every business has to be evaluated separately,” he says. “Not all assets are equal; not all markets are the same.”
Multiples tied to publicly traded companies have “gone up dramatically” in recent months, says Woodman. Though far from the 9.6x highs back at the end of 2006, valuations are rising from the mid-2009 lows of 5.3x and were at 6.9x as of late summer, according to his company’s fi gures. (See chart on p. 64.) In the fi rst half of 2011, total M&A transaction value increased about 50% over the same period 2010, Woodman says, though the number of transactions is smaller.
The issue of publicly traded companies is also one of scale. Chains with operational effi ciencies and buying power can often outbid smaller operators. “But that doesn’t mean they always do, even though they can,” Woodman says. As far as he’s seen, Don Bassell, CFO of Mid-Atlantic Convenience Stores (MACS), a Richmond, Va.-based entity backed by an investment fi rm much the way VPS is, says multiples have been “pretty high,” especially from fuel-company divestitures.
“People understand the c-store space is very stable and very predictable,” Bassell says. “We have our ups and downs, but it’s really two things: real estate and cash fl ow.”
Having a more conservative perspective, Turpin of VPS believes trading is still around 5x, though in high-growth communities, 8x may appear. “But [at 8x], you’re trading on what it’s going to be in a couple of years,” he says. “In situations like that, I can see where they demand [a higher multiple], but if you’ve got a mature market and the competition is developed, I’m not sure they’re going to go for 6x or 7x.”
Finding the right valuation means first “normalizing” the asset, meaning a review of any out-of-the-ordinary circumstance that might have influenced a store’s cash flow. This year, unusually high gas margins influenced some markets, Woodman says. Stores that have just opened may need more time to fully realize the potential of the site. And stores that come with the retail property trade at higher multiples than leased locations.
Improved Lending
Hand-in-hand with improved multiples and a growing number of willing sellers is a better lending situation. “The banks tend to be lending now and asking for lower loan-to-value percentages,” Turpin says. “I’ve heard some folks talk about 75% or 80%; that’s not been the case for many years, at least pre-banking crisis.”
For smaller, regional players, financing actually remains a challenge, Woodman says. For lenders, a new limit exists for how much they’ll fund. “If someone is paying a high multiple, say 5x-7x, the bank may only give you 3x-4x,” he says. “The rest has to be made up in some form of capital.”
Certainly private equity firms will play a role. Woodman says there are about 3,000 private-equity investors looking for somewhere to invest, accounting for $450 billion in capital.
In addition, he sees a new trend toward creative financing. While there are still instances of a buyer with a big bank account paying cash and walking away, more and more buyers and sellers are “reliant on alternatives to bridge valuation gaps.”
In some cases, the seller may retain the real estate and the buyer gets the business. In other cases, non-bank lenders such as hedge funds and insurance companies are called in. “If you look at [how low] treasuries are trading, [these sources] can finance something at an attractive interest rate, especially if backed up by real assets,” Woodman says. “But our position is that you need a professional to run the process.”
Who Will Win?
Recent M&A activity has been noteworthy, to say the least. Over just the past six months starting in March, 1,079 stores have changed hands. The most recent deals were ExxonMobil sites, with 51 going to Dallas-based
7-Eleven and 80 to Houston-based Landmark Industries. Laval, Quebec-based Circle K did well in two markets, taking 33 in Louisiana in August and a whopping 322 in Southern California in the spring. 7-Eleven met with success in Florida and New York state earlier in the year, garnering 183 ExxonMobil sites and the 188-store Wilson Farms, while a heated bidding battle for bankrupt Gas City assets in Chicago brought in Houstonbased Marathon-Speedway as a winning bidder for a multiple, sources say, that topped 10x. “Clearly Marathon went in there and sent the bidding up,” Ruben of NRC says, citing how Circle K was an initial “stalking horse.” “They wanted to protect the market and keep people out.”
Certainly another factor is the growth of so-called superjobbers, most recently with Landmark. Earlier in the year, Victory Petroleum gained 38 ExxonMobil sites in its hometown of Miami, and Empire Petroleum, Gaithersburg, Md., purchased another distributor last year.
John Flippen Jr., managing director of Petroleum Capital and Real Estate LLC, Washington, D.C., says the majors are continually trying to shrink the number of distributors they work with. “We’ve spoken to [jobbers] that have said the majors would like to have about half as many as they have currently,” he says.
And don’t count out the investment platforms that have been establishing considerable strength: VPS, MACS and Cleveland’s EZ Energy USA, as well as veteran companies such as Delek/MAPCO in Brentwood, Tenn. Also, Mechanicsville, Va.-based GPM Investments—with its Fas Mart/Shore Stop chain—recently announced a new $50-million credit facility that will launch another phase of reinvestment and acquisition.
Of course, no discussion of growth would be complete without talk of regional players expanding via new builds. Just about all the big names— Tulsa, Okla.-based QuikTrip with growth efforts in the Carolinas; Sheetz of Altoona, Pa., in Ohio, North Carolina and West Virginia; Wawa of Wawa, Pa., in Florida; and West Des Moines, Iowa-based Kum & Go in Cedar Rapids, Iowa, and Arkansas—all have made bold, aggressive moves in the past year. Their focus: new builds.
Scott Hartman, CEO of Rutter’s Farm Stores, York, Pa., whose own chain is growing in this way, says, “I don’t see … our company acquiring those older assets. I don’t see a future for them.” The question then becomes which business model will win. Arguably, The Pantry stands out as an example of what needs to happen once the acquisition strategy hits a turning point. With Terry Marks announcing his departure as company leader, his two-year legacy is largely an effort to turn an acquisition-focused company into a brand-centric one with foodservice at its core. Indeed, if anything, this longtime M&A specialist has reversed course, putting more than 100 sites on the market. (See news story on p. 22.)
The c-store business is essentially moving in a different direction than the aging major-oil infrastructure that still exists. “The majors learned as well that the c-store operation is so hard to do from a corporate office and be successful,” says PMAA president Dan Gilligan. “You can’t sit in Houston and decide what salty snack to sell in Maine.”
But dealer ranks continue to swell as fuel distributors figure out how to make the equation profitable, says Kelso of Matrix. “We really work in one industry, the petroleum distribution and c-store industry,” he says, “with many moving into the terminal business … and many understanding the value … of distribution and logistics.”
Deals along these lines include Delek’s purchase of a refinery and transport assets this past spring, as well as Marathon’s announced split this summer of its Speedway operations from its Marathon jobber segment.
Still, Susser, who has arguably achieved success with both the petroleum distribution side and c-store foodservice, says, “We’re very pleased with our new store development … and potential M&As have to compete with the returns from our new-store program.”
When to Say When
One of the trends expediting growth for companies such as Susser’s is technology. Back-office and other sales and reporting solutions are far cheaper to buy and use today than they were even four or five years ago, he says. That’s allowed him to scale up quicker at a reasonable cost.
That said, he believes consolidation is going to continue within the industry, with bigger chains getting bigger and an even greater proliferation of independent dealers. “The challenge is for the small and medium-sized chains,” Susser says.
“There’s less buying power from c-store suppliers … and on the petroleum side,” Kelso of Matrix says. “And for those of us familiar with Wawa or Sheetz, they can sell at a price the local jobber cannot, and do it for a long time.” Older marketers approaching their 50s and 60s have to seriously reflect on what they have to do to stay competitive, Kelso says, “or if it’s time to move to the next phase of their business lives.” Bassell of MACS sees the same picture. “We’re actively out there in the market looking for deals, and not the deals you see posted on websites,” he says. “A lot of it is generational turnover, people who want to do something, annuitize for their heirs and not hold onto their business.”
Businesses are also fluid. Kelso’s advice is to sell when trend lines are up: “If you wait too long, people better capitalized will be taking your business rather than buying [it].”
Yet another impending hurdle for many companies will be debt refinancing, says Woodman of Morgan Keegan. About $450 billion in middle-market debt will mature between now and 2014, he says: “So if you’ve got a c-store operator that financed debt over time in a robust [lending] environment, they’re not going to be able to replace that debt—or [lenders] will, but they just won’t replace it with what’s now in place.”
Brave New World
With the dust settling on this latest round of industry M&A, the winners are emerging, with those left curious about how the market will change.
In a CSP Daily News poll, retailers seemed less concerned with the changeover of traditional oil-company assets as they were with the intrusion of regional players with their new builds. In the poll, taken in late August, 36.7% of the 234 respondents named QuikTrip as the competitor they’d least like to enter their market. Sheetz came in second at 18.4%. (See chart on p. 62.)
Their fear has solid footing, says David Bishop, an industry consultant with Barrington, Ill.-based Balvor. There are essentially two types of market changeovers, he says. One happens when an acquirer comes in and essentially does a facelift on sites, including new paint, signage and logos. Typically the acquirer is already in the market, and whatever brand equity the new owner has transfers to the purchased location.
One industry source, who preferred not to be named, said one industry consolidator took over a c-store next to his home eight years ago “and they still use the same roller grill.”
That type of change has decidedly less impact than what Bishop describes as the second type, one involving new entrants. “QuikTrip is one of those you really don’t want to have enter your market,” he says. “They’ve learned how to enter and penetrate new markets.”
Competitors such as QuikTrip, he says, will price coffee at 29 cents per cup, promote it in stores and billboards all over town and keep that price for six to nine months. “It’s very hard for a retailer with established share to respond in a way that can defend that customer,” Bishop says, citing how competing against a newly built, state-of-the-art location is tough enough. “They’ll do it to drive traffic— and by the way, they have a strong fuel price too.”
No one disagrees that a new, foodservice- focused, power-buying, well-run store will beat out an older asset. Opening one across the street from an older store would certainly hurt volumes. But everyone agrees that these older assets still have value, and what’s really occurring now is that buyer and seller expectations are starting to line up.
“The companies that keep their focus on customers, growing same-stores sales and managing expenses will be successful,” Susser says. “Some grow with M&A, some through new-store growth and some with both—and some companies just don’t grow. There’s a lot of ways to skin a cat.”
Why IPO?
When people raise questions about what drives mergers and acquisitions, talk drifts to topics of creating value, which many see with the fragmented c-store industry. After creating value, one logical step is to go public.
Liquidity is one reason, says Dennis Ruben, managing director of NRC Realty & Capital Advisors, Chicago. “It allows people to cash out on their investment,” he says, citing how investment firms that back c-stores may decide after a certain point to do an initial public offering (IPO).
Others do it to generate cash. That may be the case for Dallas-based 7-Eleven. Two franchisees who are well-established in the system tell CSP they’ve been hearing rumors of 7-Eleven going public again for some time now. The company has been very prolific of late regarding M&A, and the desire to go public may be part of that reason.
Publicly, company officials have cited the need to grow their numbers as a way to reach maximum efficiency, especially as it relates to foodservice and distribution. Their foodservice hubs need a certain number of end points to make the operation viable, according to sources who spoke to CSP under condition of anonymity.
An IPO may be a way for the company to further its mission. Officials with 7-Eleven declined comment.
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