Zero.
That’s how many stores EZ Energy started with on its semimeteoric rise to c-store chaindom. When EZ Energy began its climb in 2007, it didn’t have a place to call headquarters, nor a clear vision. What company founders Eli and Oren Zahavi—along with a very experienced personnel acquisition, former CFO of Dairy Mart Gregg Budoi—did have was cash. It was enough to make that first purchase. The cash was raised from personal equity invested in a publicly traded Israeli company. They just weren’t sure where to start.
So they picked up the phone.
“When we first started, it was just the three of us coldcalling people,” says Budoi, president and CEO, from the company’s new headquarters outside Cleveland. “Quite frankly, convincing an operator that three guys want to buy their business when they’re getting calls from Couche-Tard and The Pantry—all these people who are demonstrated acquirers. … But what we try to pride ourselves on is: We do deals. We do fair deals. We get them done.”
The three began by concentrating on private companies that weren’t officially for sale. Their aim was to find a chain for which negotiations could remain private, and they could retain all management.
“Even still, outside of showing a seller a checking account with $20 million to $50 million in it, most people are rightly skeptical of the capacity issue when we didn’t have an operating company,” Budoi says. “So it was constantly a ‘chicken or the egg’ scenario, where we were trying to convince investors and banks that we had a deal while convincing the seller that we had the capital 100% locked up.”
The road was bumpy, to be sure. In business, emotions don’t generally come into play when the deal is set to go down. But EZ Energy, composed of formerly family-owned and -operated businesses, was treading in sensitive territory, to the extent that even years after the acquisitions, Budoi is still uncomfortable mentioning any specific stories.
“In the end, most private companies [like the ones we try to acquire], are family-owned, and once family is involved, emotions sometimes get in the way of business,” Budoi says. “So crafting a deal to make all constituents happy is often a challenge. Determining the motivation to sell in order to identify who really wants to sell vs. who is just fishing to validate their enterprise value is a time-consuming and sometimes expensive task.”
Whether it was confidence, moxie, cash or some blend, the three upstarts finally completed their deal in June 2007 with independent chain Central Ohio Energy. Now, after four deals in less than three years, the company’s store count stands at 92, with the potential to double at any moment. (Indeed, as CSP went to press, EZ Energy had shown interest in acquiring majority share of a group that runs the 214-unit Fas Mart chain in the Mid-Atlantic.)
GROWING UP
EZ Energy is a 21st century story of equity and investment that is sweeping across the c-store landscape. In the Rockies and West Coast, Pacific Convenience & Fuel, buoyed by previously unknown leader Sam Hirbod, made the sizable acquisition of ConocoPhillips’ retail network. In the Midwest and Southeast, Sun Capital Partners percolates with acquisitions of Village Pantry, Worsley and Li’l Cricket Food Stores.
And like PC&F and Sun, EZ Energy USA, having not made an acquisition since last June, is finding today’s sluggish market strewn with impediments and roadblocks. That, however, doesn’t mean it isn’t looking: The company’s goal is to grow to 200 to 300 stores in the relatively near future. Part of that larger picture is to include a vertically integrated strategy that to date has netted it a jobbership within the Cleveland and Pittsburgh markets. Major oil’s divestment has certainly played into that plan, making available quality stores, an established dealer network and a foothold into the supply chain.
EZ Energy’s strategy, in some ways, resembles the likes of fellow Israelbased firms Alon and Delek. But instead of purchasing a refiner and moving downstream, it appears EZ Energy’s strategy is to start at the bottom and acquire its way up—from the stores to a jobbership, and perhaps pipelines and a refinery. The execs will not limit their possibilities. But such a strategy means accelerated growth.
“[All of our acquisitions] were just getting us to the size where [we were] interesting,” Oren Zahavi says. “Now the size is where we have enough stores to support the management structure; we’re jobbers now and we can support that infrastructure, and we can continue to run the company as is.”
That said, he quickly adds, “We’re a growth company. We’re looking for acquisitions all the time.”
The company’s short timeline reads more like a fast-paced thriller than drawn-out drama. It begins with Eli Zahavi, somewhat of a c-store legend in his native Israel with a penchant for entrepreneurialism, including executive experience at Delek and a four-year stint running the 250-station Caribbean Petroleum Corp. in Puerto Rico. (See sidebar, p. 48.)
David Wiessman, executive chairman of Dallas-based Alon USA, first met Eli during their Delek days in the 1990s. “He was a very capable guy— very intelligent, someone who knows the business. I was so impressed in working with him that I suggested him to [the owner of Caribbean Petroleum Corp.],” Wiessman says in an interview with CSP.
In addition to describing Eli as exuberant and social, Wiessman praises Eli’s uncanny insight into the business from the supply chain through to c-store operations.
After four and a half years with Alon, Eli sold his shares to the majority and took a year to wait out his noncompete clause. He and his son, Oren, began looking for acquisitions in the United States.
“We pulled back and we saw that we would be limited in our capacity privately on how much we could buy or how much we could grow,” Oren says.
So the two moved in a completely different direction, purchasing the publicly traded EZ Energy in Israel. The company was nothing but a shell—no stores or operations associated with the name.
Eli moved his equity into the company, issuing bonds in Israel to fund potential U.S. operations. The family controls about 80% of the shares.
Many investors find the stability of U.S. contractual agreements and the country’s overall business climate to be much more amenable than that of other countries. As Wiessman puts it, it’s all about removing potential volatility: “Israel is our home, but the envi-ronment in the U.S. is easier, stabilized. You know what to expect.”
Ray Cleeman, managing director of the investment bank PrinceRidge, New York, says that despite the general attraction of foreign investors to the United States, they should be careful when determining where they place their money because the industry and the economic environment isn’t the “pot of gold at the end of the rainbow” it once was. But certainly, if EZ Energy is any representation, opportunities exist.
“It’s probably had a negative effect on some foreign investors,” Cleeman says. “But overall, the smart guys are going to be coming here. … I think that’s what the EZ Energy guys are doing, and they’re doing it smartly. They’ve defined a great secondary market and will continue to take advantage of that.”
EZ’s first U.S. c-store acquisition took place in June 2007. The purchase of Mansfield, Ohio-based Central Ohio Energy involved 14 stores, eight company- operated and six dealer-operated sites. The company retained all management and established its headquarters in the small central Ohio town.
Things accelerated from there. Two months later, EZ purchased 17 BP sites in Pittsburgh, all company-operated. Just more than a year later in September 2008, it purchased 20 additional BP sites, establishing the company as a BP jobber for the Pittsburgh market.
Vertical integration has always been a critical part of the company’s overall plan. To Oren, the execs’ knowledge of fuel-supply operations and an understanding of its effect on the bottom line of the c-store makes it a deal breaker or maker: “I don’t think we’ll enter into an arrangement where we’re not jobbers on any future acquisition.”
And EZ hasn’t. In June 2009, its last acquisition to date, EZ Energy purchased 41 locations from BP in Cleveland, becoming jobbers for the brand in that market. In all, the company currently owns 92 stores, of which it directly operates 68.
“We ended up making four acquisitions in less than 24 months,” Oren says. “According to our initial strategy— unlike Alon and Delek, which acquired a very large portfolio—we’re targeting small chains. Fifty to 100 stores would be our maximum per acquisition.”
The company’s stores average $1 million in inside sales and about 2.25 million gallons—higher than the NACS industry average of 1.4 million gallons of gasoline. In an industry flooded by smaller operators, this scalability puts the company in the catbird seat, affording it the discretion to pick and choose its next acquisition.
FIGURING OUT FINANCIALS
Considering EZ’s flurry of activity occurred amid the collapse of the nation’s largest financial entities and historic bailouts from the U.S. government, the logical question is: How did they do it? The “EZ” answer is: relationships.
In fact, when asked, Budoi could rattle off the phone number of the company’s banker from memory.
The more complicated answer is intricately constructed financing. Dean Haberkamp, EZ Energy’s banker who frequently interacts with Budoi, says the deals done thus far have involved numerous resources and financial instruments. Among these have been mezzanine financing, subordinated debt, sale-leaseback, straight-term debt, cash and seller notes.
“So it’s not just a company and a bank,” says Haberkamp, vice president of commercial banking for Cincinnatibased Fifth Third Bank. What especially satisfies Haberkamp is EZ Energy’s ability to make its operations “transparent” to the lender, offering the proper audits and reports needed to assess progress, cash flow and other indicators of a chain’s health.
All this helped a year ago, when the financial crisis ripped across the country. “When credit got tight, we had the benefit of hindsight of two years,” Haberkamp says, citing that Fifth Third had been a part of all of EZ Energy’s acquisitions. “They had a strong and diverse capital base, a number of [resources] and other investors to put together a stable structure … to complete the acquisition in May 2009.”
The management team did a good job of preparing the bank with facts and detailed analysis of pricing within the targeted markets. They were prepared to answer questions, provide support documents and garner sufficient collateral in real property.
All the work built upon itself, allowing the company to piece together a management team that today, as Haberkamp estimates, could easily take in 20 to 50 new stores. Oren Zahavi says beyond the bricks and mortar associated with acquisition, scalability has allowed the company to hire superexperienced team members—“the best of the best,” such as Damon Cranford, for example, who spent 10 years with Atlanta-based RaceTrac and another 10 with Tulsa, Okla.-based QuikTrip.
Suppliers such as Kevin Bandi, senior accounts executive with EZ Energy’s wholesaler, Liberty USA Inc., West Mifflin, Pa., notice experience at many levels of EZ’s operations. “They’ve employed buyers and merchandisers who have experience in the industry, who know what they need to do to be viable,” he says. “They may be people from outside the industry who they’ve brought in, but they’ve got experience—maybe a beverage buyer from another company or a merchandiser that was working with another c-store supplier.”
PrinceRidge’s Cleeman says the management team’s strategy is both sound and effective: “Clearly, EZ Energy has figured out that right structure, because they’ve been successful.”
A TASTE FOR ACQUIRING
The company’s first trick is measured growth.
It’s a balance between being opportunistic and calculated, Budoi says: “One of the things that we’re doing is acquiring a lot of assets and a lot of stores, but all along the way it’s about quality assets.”
Having lived through the 2002 Couche-Tard purchase of Dairy Mart, Budoi appreciates the need to reconfigure one’s portfolio and continually position a c-store network for the future.
“There have been a lot of stories [where you hear about someone] who has acquired a lot of things that don’t necessarily have long-term viability to them,” he says. “We’re trying to have a very good concentration of quality locations.”
Specifically, quality assets can be defined as many things. For EZ, it centers on store size and revenue opportunity. “We’re not looking for little kiosks. We’re not looking for small stores that don’t have a lot of life in them,” Budoi says. “Frankly, that makes our acquisition path difficult. We’ve passed on so many.”
The company’s stores range in size from 2,500 to 4,000 square feet. Despite the size, each store is run with one key principle in mind: to operate with integrity and be a good partner to both suppliers and employees. Because it’s essentially a family-run enterprise, EZ Energy’s upper management is very in tune with each employee down to the site level. “The sense of community is driven top down,” Cranford says.
Another important detail is EBITDA. EZ Energy is a cash-flow buyer, so the EBITDA multiples are important. If inside sales are $500,000 a year, EZ will more than likely not consider the acquisition, even if it’s a 5,000-squarefoot store, Oren says. The company is looking to purchase anything at or above NACS averages for inside sales, as long as it fits the other criteria.
“Eventually, if it’s an interesting transaction, we obviously tour all the sites, and we look at what has potential. It might only average $1.2 million—but we can still think they’re great,” Oren says. On some matters, the thinking is not conventional. For instance, an asset need not be underperforming to be a good purchase. “There really is no magic number where we have to improve it by 20% to make it worthwhile,” Oren says. “We assume that we’ll continue to operate it as is, and this is what it’s worth. If there’s upside, that’s great; if not, then we’ve got what we paid for it.”
The company will also consider the community and neighborhood demographic. And again, it all comes down to quality.
“Our average sales in terms of volumes are more than two times the average U.S. gallons per store. Again, the strategy is to grow and to benefit from the economy of scale on the fuel but also on the inside store,” Eli says.
FINDING ITS RETAIL FACE
Ambitious on the growth side, EZ’s retail brand remains one in search of an identity. Here, like other growth chains, foodservice will play a big role in its steps toward differentiation and profitability. Liberty USA has a hand in it with its De Vinci full-service foodservice concept, providing a visual presence and a line that balances product appeal with labor use.
“At the end of the day, you’re still a c-store,” Cranford says. “You’re not going to get $20.99 for a plate, so you have to maximize the value of that [product] at a lower ring, and make it more efficient for the employee to make.”
De Vinci incorporates subs, salads, pasta dishes and pizza, but it’s executed in a manner that is not labor-intensive. For smaller-format locations, there’s a pared-down version with pizza and sandwiches made off-premise. This concept reduces employees’ time commitment to the program.
Achieving a quality offer is still important for EZ Energy, says Bandi of Liberty USA. He says the chain has been testing thaw-and-serve baked products at certain locations and has been very happy with its reception and the fact that it requires less labor.
Cranford believes the idea is to get the employee back out in front of the customer to provide exemplary service: “We want to get them out of the kitchen and back to the front of the store.” Beyond the food offering, Cranford describes the other half of the sites as “traditional c-stores,” without much variance in allocations for the staples of beer, cigarettes, candy and snacks as any industry-benchmarked store.
What Cranford does focus on is the basics. He pushes three main goals:
Be lean and efficient. Because c-stores are a low-margin business, management must be attuned to labor, simplifying processes wherever possible, especially when it comes to foodservice. “We’re still learning to be a c-store, not cooks,” Cranford says.
Focus on people. The motto here is to promote from within and continually find ways to reward people. It’s a company culture; incentives are provided to enable employees to grow and move to the next job. In fact, most employees are promoted from within the company.
Don’t reinvent the wheel. There are enough quality players to learn from. “One day hopefully we’ll be big enough and far enough ahead of the curve where other people look to us,” Cranford says.
“They get it,” says Haberkamp, EZ’s banker. “They’re not just about the sale of fuel. It’s about what’s the right fountain [offer]. It’s about foodservice. It’s about blocking and tackling—keeping the place clean, having a smile on your face and asking people how they’re doing.”
For now, the company is content to maintain and improve its existing locations, but it’s also keeping a keen eye on future growth. The rumored Fas Mart merger is just one of many possibilities awaiting this young company. While that deal at press time appeared highly unlikely, EZ’s leaders say the seed has certainly been planted for additional growth in the coming months.
“Our future is going to be predicated on the capital we can get together, and [the deal] making sense,” Budoi says. “Capital providers are looking for the same things we’re looking for, which are, ‘Why are you doing it? Why are you investing in this market?’ We have to have a story that makes sense. As long as you’re executing that consistent story with discipline, people are willing to work with you.
“It’s going to be a quick but a measured growth.” —With additional reporting by Samantha Oller
Eli Says
Dr. Eli (pronounced El-e) Zahavi, chairman of EZ Energy, began his career as vice president of operations and marketing for Tel Aviv-based Delek, an Israeli oil company. In 1996 he moved to the United States and managed a company in Puerto Rico called Caribbean Petroleum Corp. that had 250 stations and a small refinery. Four years later, he began scouting additional opportunities in the United States. It was at that time that Fina, the retail arm of Belgian oil company Petrofina, began exiting the market. Eli brought Alon to the states from Israel to take a look at the opportunity. That introduction turned into a lucrative deal that made Eli a minority shareholder as well as vice chairman of the group Alon USA. Here’s what he has to say about his most recent venture and working with his son, Oren.
“Our strategy is really to own and operate the store ourselves. We are excellent operators, not only with the gas, but also with the convenience stores. We are not going to give up on quality.”
“I’m the guy—I look into the details. The devil is in the details. Usually, again quality is my No. 1 strategy, and the district manager and manager and employees know that the store should be as clean as possible. Restrooms should be clean, and lights and all dispensers should work. All the employees should be nice and clean and smile. That’s my strategy. If I come and see something on the floor is not good, or someone is not shaved, or the restrooms aren’t cleaned, I really get mad. And I’m serious about it.”
“I am in favor of competition. I encourage competition because to me wherever you are, the longer you stay, the more profit you’re going to make. You’re going to survive longer.”
“It’s not because he’s my son, but if he was not my son, I would need someone like Oren. He’s very smart, very sharp, very polite, very honest and straight to the point. He looks straight into your eyes and [he’s great at] analyzing the potential of acquiring stores and the regional chains, and he’s not going to give up on having all the information before making decisions. Very solid. Very conservative. And he knows, and he understands how to finance deals in difficult times when financing isn’t there. And it’s not just Oren. It’s Gregg and Damon, all the managers; they know that they have to be at the top. Otherwise there is no way that they can win and compete against the others.”
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