With more than 60,000 c-stores worldwide, 7-Eleven (No. 1 on CSP’s Top 202 list of the largest c-store chains in the United States) is an industry behemoth. And it is about to get even bigger, after recently gobbling up approximately 1,110 more stores from Dallas-based Sunoco LP.
The $3.3 billion deal between Seven & i Holdings Co. Ltd., the Tokyo-based parent company of 7-Eleven Inc., and Sunoco is one of the largest acquisitions in 7-Eleven’s history. As part of the deal, 7-Eleven will also obtain the associated trademarks and intellectual property of the Stripes c-store brand and Laredo Taco Company, a made-to-order foodservice concept that features Mexican and Southwest fare.
For 7-Eleven, the acquisition is largely about growing its numbers in the United States. “We see opportunities there,” Seven & i President Ryuichi Isaka said while presenting the company’s latest financial results.
But for Sunoco, the deal represents a shift away from retail and toward wholesale-fuels distribution.
In May 2016, Isaka said Seven & I planned to increase the number of 7-Eleven c-stores in the United States to boost overall market share. This was to counter slowing demand in Japan, where Seven & i has about 19,000 stores but is facing a declining population and increasing store openings by large rivals, according to a report from Nikkei Asian Review. In addition, operating profit at the company’s domestic unit, which controls c-store interests in Japan, China and Hawaii, is forecast to remain flat in the fiscal year ending February 2018.
To offset this lull, Seven & i plans to increase its U.S. store count to 10,000 by fiscal 2019, according to Nikkei Asian Review.
7-Eleven has 8,707 stores in the United States and Canada; the Sunoco deal (expected to close in the second half of 2017) will boost that number to approximately 9,817.
“This acquisition supports our growth strategy in key geographic areas, including Florida, mid-Atlantic states, Northeast states and central Texas,” said Joe DePinto, president and CEO of Irving, Texas-based 7-Eleven Inc. “It also provides 7-Eleven entry into Houston, the fourth-largest city in the United States.”
And in early April, Seven & i announced a new business segment plan that positions c-store operations as a growth pillar, with domestic and overseas operations managed separately to reflect their different market attributes. The overseas unit will control c-store interests in the United States, with the exception of Hawaii.
When the restructure is complete in early 2018, 7-Eleven Inc. will focus on a growth strategy that includes acquisitions. At the same time, the company plans to boost its prepared-foods offering by making quality and service improvements.
Seven & i has been beefing up its U.S. stores by following its Japan strategies, which include ready-made foodservice.
This focus has helped operating profit in the United States climb approximately 10% every year, Nikkei Asian Review reported.
In addition to the more than 1,110 stores it’s selling to 7-Eleven, Sunoco plans to sell 207 more company-operated c-stores—182 in West Texas and New Mexico and 25 in Oklahoma and north Texas—in a separate process. But Sunoco, a master limited partnership (MLP) controlled by pipeline operator Energy Transfer Equity, isn’t exiting the retail business. It will hold onto more than 50 retail sites in Hawaii through its Aloha Petroleum business, as well as its APlus c-store franchise.
“Both of those assets are key to us going forward, things we’re interested in growing,” said Sunoco President and CEO Bob Owens in a conference call on the deal with 7-Eleven.
Part of the reason Sunoco is selling its company-operated retail outlets is to address concerns about the company’s leverage metrics. By the end of the fourth quarter, Sunoco’s net debt-to-adjusted EBITDA ratio had grown to 6.5x, even after the company sold $71.4 million in stock units to pay down some debt. A leverage ratio below 4.0x is typically considered safe for an MLP.
“The transaction with 7-Eleven, in combination with the sale of our convenience stores in West Texas, New Mexico and Oklahoma, significantly improves our financial position,” Sunoco CFO Tom Miller said on the April 6 investor call. Sunoco LP expects the divestiture to reduce its leverage ratio to the 4.5x to 4.75x range.
The deal with 7-Eleven is also Sunoco’s first step at focusing more on its fuel-supply business. As part of the transaction, Sunoco will have a 15-year, fixed-margin, take-or-pay supply contract with 7-Eleven subsidiary SEI Fuel with a base volume of 2.2 billion gallons per year. Post-transaction, 7-Eleven will make up 29% of Sunoco’s wholesale fuel volumes.
“The plan is to be the finished petroleum product arm of the [Energy Transfer] family,” Owens said. “As we look at the marketplace in total and the assets we have available, there’s lots of room to grow that.”
Sunoco also supplies fuel to about 6,900 locations in the Northeast, Southeast and parts of the Midwest, and it plans to grow this business as well.
“We continue to believe one of the key assets of the corporation is the attractiveness of the iconic Sunoco fuel brand, and that provides us with ongoing significant growth opportunities, both with partner 7-Eleven … [and] other third-party players,” Owens said.
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