Still pending Pilot-Flying J deal likely to result in truck stop divestitures, industry bankers say

Pilot Travel Centers ’ pending USD 1.2bn acquisition of Flying J travel centers would create additional M&A momentum in the truck stop industry, including likely divestitures by Pilot, two industry bankers said. First announced in July 2009, the deal is likely to be held up by regulatory antitrust concerns raised by the size of the deal, the bankers agreed.

They speculated that Pilot has quietly identified or perhaps even spoken with potential bidders, in preparation to divest some locations to satisfy antitrust authorities. The merger would create the largest owner and operator of truck stops in the U.S., with more than 550 locations. Pilot reasonably could be required to divest 10% or more of the merged companies’ sites, or upward of 50 stores, predicted the first banker, Tom Kelso of Matrix Capital Markets. The second banker agreed that 5% to 10% would be a reasonable estimate. Ultimately, the antitrust authorities will examine competition on a local-market level to determine which and how many locations should be sold or shut down, they said.

Given the average per-store value in the Flying J acquisition, the total value of potential divestitures could be estimated upward of USD 200m.

Knoxville, Tennessee-based Pilot announced in July a preliminary agreement to acquire Ogden, Utah-based Flying J’s travel center operations out of bankruptcy. Flying J later told the bankruptcy court the deal would provide USD 1.2bn of value, including cash and equity shares in the new company, and the U.S. Bankruptcy Court in Delaware approved the sale in January.

Despite that approval, the deal has yet to be made final. A Pilot spokesperson said the company is declining all press interviews while the deal is pending. An online industry newsletter reported earlier this month that the companies faced a deadline of 30 April to complete the merger, although Pilot CEO Jimmy Haslam responded with a statement denying the existence of a deadline. “We are continuing to work with the Federal Trade Commission, and we are optimistic that everything is going to work out,” he stated.

The Pilot-Flying J merger also puts pressure on the other major players in the truck stop business, including privately held Love’s Country Stores and the listed TravelCenters of America , Kelso said. Love’s has traditionally made selective, strategic acquisitions but “won’t just buy anything,” he said, and predicted Love’s would maintain that strategy. TravelCenters, on the other hand, has less access to capital to make acquisitions, due to the structure of its lease agreements with Hospitality Properties Trust , which formerly owned the business and still owns the real estate of TravelCenters’ stores, Kelso observed.

Independent truck stop operators also could take interest in acquiring divested Pilot locations, the bankers agreed. Kelso noted that some of the smaller truck stop locations function more like convenience stores and could attract a broader range of bidders, including major convenience store operators, such as The Pantry , 7- Eleven and Alimentation Couche-Tard (owner of the Circle K brand).

Pilot and Flying J each ranked among Forbes’ list of largest private companies last year, with approximately USD 17bn and USD 18bn, respectively, in 2008 revenue. In their initial deal announcement last July, Flying J's advisors were listed as The Blackstone Group and Kirkland & Ellis, while Pilot's legal advisor was White & Case.

By Chris Marr in Atlanta with Mergermarket North America

04/28/2010