58 CSP October 2011 Done Deals Twilight rounds of major-oil selloffs reveal lead players, set stage for market change

By Angel Abcede & Steve Holtz [email protected] & [email protected]

o 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. TAt 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 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. * The number of c-stores that have changed hands in the six months since March 2011 Source: CSP Daily News and cspnet.com

CSP October 2011 59 Scorecard for Market Change With headline-making mergers and acquisitions happening multiple times in the past few months, clear leaders have emerged. Then add regional titans with new-build expansion, and the bigger picture emerges. Here’s a snapshot:

1. 7-Eleven: Since its coup last 7. Marathon (Speedway): ▶ EZ Energy USA: This summer, year of 183 ExxonMobil sites Winning a tussle for about the chain bought 30 sites, in Florida, the chain has picked 50 stores from the bankrupt bringing it to 120. up 188 Wilson Farms locations Gas City chain and splitting in New York state and 31 more its Speedway chain from its ▶ CEFCO: Bought 69 Food Fast ExxonMobil stores in Dallas. In Marathon jobbers were big stores this summer. WA MT ND terms of M&A, 2011 will be its moves for 2011. Landmark Industries: Picked “biggest year since 1986.” ▶ MN 8. Sunoco: On an aggressive up 80 Houston stores from the ME NH 2 . Circle K: Parent company growth spurt, the company ExxonMobil selloff this summer. SD WI Alimentation Couche-Tard is bought 14 stores this past OR VT Speedy Stop: Won the bid ID fi nding “quality stores at a fair summer, but since the start ▶ WY MI for 61 stores in Austin and San NY price,” having bought 322 of 2010 it has amassed 215 IA MA Antonio from ExxonMobil. ExxonMobil sites in California and new sites. NE 33 in Louisiana. It purchased 43 PA ▶ Victory Petroleum: Picked up RI in the Mid-Atlantic, the Midwest 9. Mid-Atlantic Convenience IL IN OH 38 ExxonMobil sites in Miami. NV and Canada this summer. Stores (MACS): Built from the UT CO starting point of the Uppy’s chain WV CT ▶ Empire Petroleum: KS MO 3. : In a bit of a and an assembly of ExxonMobil This summer completed a KY VA turnaround, the acquisition- sites, the 300-store chain is NJ $30.5-million equity offering. CA focused chain found 114 sites looking to double its size over the OK TN NC that don’t fi t their current next three years. ▶ : The chain is AR DE strategy. expanding in Ohio, North 10 . GPM Investments (Fas AZ NM Carolina and West Virginia, with SC MD 4 . Casey’s General Stores: Mart/Shore Stop): Having a goal of taking its 400-store MS AL GA After last year’s hostile takeover just closed on a $50-million count up to 500. attempt by Couche-Tard, Casey’s credit facility, the company says 2. “Quality TX LA has been more aggressive, it will improve cash fl ow and ▶ Kum & Go: Planning for 10 stores at a picking up 22 stores from aggressively grow the business. stores in Cedar Rapids, Iowa, and fair price.” Kum & Go and planning new another 25 in central Arkansas. stores in Arkansas. It promises ▶ VPS Convenience Stores: shareholders 4% to 6% annual Funded via an investment fi rm, ▶ : Projecting as many AK FL store growth. VPS takes advantage of sale- as 100 stores in Florida, having leaseback opportunities and sees reportedly signed leases in HI 5. Susser: Stripes was on tap improved lending rates. Orlando. to build 22 new stores, a record year for construction. ▶ Delek/MAPCO: The company is moving up the supply chain 6. QuikTrip: Charlotte, N.C., is with the purchase of a refi nery a target with 60 stores planned and related transportation system. over the next fi ve years.

Discussions with more than a dozen players to fuel distributors with expansive in the year, bidding battles in Chicago for sources on the state of mergers and dealer networks—evolve and strengthen. sites held in bankruptcy made headlines, acquisitions within the channel quickly “People are looking to improve busi- as did news of regional players claiming zero in on store counts, valuations and ness models, refi ne business models,” says new markets and others who assembled the competitive landscape, with several Kelso of Baltimore-based Matrix Capital. credit facilities and are ready to “aggres- newly announced purchases peppering “Some may [even] go back to old models sively” re-enter the buyer’s market. the wires all summer. (See chart, above.) that tie supply more closely to [retail].” Obviously, the underlying motive is But ultimately the latest round of retail Recently, buyers for ExxonMobil growth. Whether it’s better economies of selloffs is a test of wills, as business para- properties in Southern California, Texas scale, a push into new markets or investor digms—from foodservice-rich regional and Louisiana came to light. But earlier pressure, central to the current window of

60 CSP October 2011 Top 10

1 2 3 4 5 6 7 8 9 10

4. 4% to 6% 1. 8. annual store “Biggest Amassed WA ND growth year since 215 new MT 1986.” sites MN ME NH SD WI OR ID VT WY MI NY IA MA NE PA IL IN OH RI NV 7. UT CO WV KS MO CT KY VA CA NJ OK 4. TN NC AR DE AZ NM 3. SC 114 sites MD MS AL GA that don’t fi t 1. TX LA

2. 9. Double 6. 60 stores 1. its size planned AK FL 10. HI $50-million 5. credit A record 7. year for Splitting construction

change is the need for sustained growth. proving its resilience during the reces- major-oil packages stoking the heat. Influencing the outcome of all this sion, c-stores are becoming an attractive ▶ cheap Money. Continuing low activity are several developing trends: place for investors to park their money, interest rates lure buyers, but they favor ▶ Big consolidators taking the with numerous platforms already in place those who can invert the equation to Upper Hand. With fi nancial facilities in in the Northeast and Midwest actively outbid their competitors. place and cash on hand, the household scouting for new deals. ▶ Willing lenders. The lending com- names, chief among them 7-Eleven and ▶ Higher valuations. Though not munity appears to be loosening up, offer- Circle K, have been making moves and as high as pre-recession 2007, sources ing better debt ratios for stores as well as winning bids. say valuations are moving back in some for sale-leasebacks. ▶ investor Action. With the industry markets to above 6x, with evaporating ▶ Market rebound. With those

CSP October 2011 61 Defining Growth, Competition When posed questions about growth and competitive forces, retailers seem more inclined to look for answers from within. At the same time, they’re keenly aware of who may be their biggest threat. “Valuations are very good across the What growth strategy is a priority board, but every business has to be evalu- for your company? ated separately,” he says. “Not all assets are Increase same-store sales 45.7% equal; not all markets are the same.” Acquisition 21.6% Multiples tied to publicly traded com- Cut expenses 15.5% panies have “gone up dramatically” in New builds 12.1% recent months, says Woodman. Though None of the above 5.1% far from the 9.6x highs back at the end of 2006, valuations are rising from the Source: CSP Daily News Poll. Based on 116 respondents. mid-2009 lows of 5.3x and were at 6.9x as of late summer, according to his com- If one of the competitors below entered your market, which one would be the biggest threat? pany’s fi gures. (See chart on p. 64.) In the fi rst half of 2011, total M&A transaction QuikTrip 36.7% value increased about 50% over the same Sheetz 18.4% period 2010, Woodman says, though the 7-Eleven 12.7% number of transactions is smaller. Wawa 10.3% The issue of publicly traded com- Speedway 5.6% panies is also one of scale. Chains with Circle K 5.1% operational effi ciencies and buying power Fas Mart 0.9% can often outbid smaller operators. “But Sunoco 0.9% that doesn’t mean they always do, even Delek/MAPCO 0.9% though they can,” Woodman says. Other 8.5% As far as he’s seen, Don Bassell, CFO Source: CSP Daily News Poll. Based on 234 respondents. of Mid-Atlantic Convenience Stores (MACS), a Richmond, Va.-based entity higher valuations, more chains and job- ends, with an increase in the independent backed by an investment fi rm much the bers who have been sitting on the side- dealer segment and continued growth for way VPS is, says multiples have been lines, waiting out the recession, may be consolidators. “pretty high,” especially from fuel-com- ready to make a deal. For both new and ongoing bargaining, pany divestitures. ▶ defensive Buying. In some price will undoubtedly make the differ- “People understand the c-store space instances, buyers are considering pur- ence. Jeff Turpin, chairman and CEO of is very stable and very predictable,” Bassell chases not as an opportunity for growth VPS Group, Wilm- says. “We have our ups and downs, but it’s but to lock out competitors. ington, N.C., says lower lending rates really two things: real estate and cash fl ow.” ▶ Healthy Assets coming to for sale-leasebacks, for instance, help his Having a more conservative perspec- Market. With competitive pressure from chain. “We’re active in the sale-leaseback tive, Turpin of VPS believes trading is still both consolidators and regional titans, market,” he says. “So a lower rate for us around 5x, though in high-growth com- midsize chains may find it harder to lowers our break-even rate at the store.” munities, 8x may appear. “But [at 8x], compete, potentially putting lucrative, “With c-stores, everything will make you’re trading on what it’s going to be in high-volume assets on the market. sense for the right price,” says Dennis a couple of years,” he says. “In situations Assessing the overall situation, Wood- Ruben, managing director of NRC Realty like that, I can see where they demand man of the Memphis, Tenn.-based Mor- & Capital Advisors, Chicago. [a higher multiple], but if you’ve got a gan Keegan says, “We see an oversupply of mature market and the competition is below-average assets and real demand for Rising Valuations developed, I’m not sure they’re going to higher-quality assets.” So where have prices been going? Though go for 6x or 7x.” Such metrics are encouraging at both tides are rising, Ruben cautions sellers. Finding the right valuation means

62 CSP October 2011 to be made up in some form of capital.” Tracking Valuations Certainly private equity firms will play Over the past five years, multiples used to determine the value of a c-store have a role. Woodman says there are about peaked and fallen, with the past year seeing a steady recovery. 3,000 private-equity investors looking for 12/31/05 8.4x somewhere to invest, accounting for $450 3/31/06 8.1x billion in capital. 6/30/06 8.2x In addition, he sees a new trend 9/30/06 7.5x toward creative financing. While there 12/31/06 9.7x are still instances of a buyer with a big 3/31/07 8.9x bank account paying cash and walking 6/30/07 8.7x away, more and more buyers and sellers 9/30/07 8.4x are “reliant on alternatives to bridge valu- 12/31/07 8.5x ation gaps.” 3/31/08 7.4x In some cases, the seller may retain 6/30/08 6.7x the real estate and the buyer gets the 9/30/08 7.5x business. In other cases, non-bank 12/31/08 6.2x lenders such as hedge funds and insur- 3/31/09 5.5x ance companies are called in. “If you 6/30/09 5.3x look at [how low] treasuries are trading, 9/30/09 6.0x [these sources] can finance something 12/30/09 5.7x at an attractive interest rate, especially 3/31/10 6.4x if backed up by real assets,” Woodman 6/30/10 6.7x says. “But our position is that you need 9/30/10 6.3x a professional to run the process.” 12/31/10 6.8x 3/31/11 6.6x Who Will Win? 8/9/11 6.9x Recent M&A activity has been notewor- thy, to say the least. Over just the past six 4.0x 5.0X 6.0X 7.0X 8.0X 9.0X 10.0X months starting in March, 1,079 stores Source: Morgan Keegan, based on information from publicly traded companies Alimentation Couche- Tard, Casey’s General Stores, The Pantry and Susser Holdings have changed hands. The most recent deals were ExxonMobil sites, with 51 going to Dallas-based 7-Eleven and 80 first “normalizing” the asset, meaning a and a growing number of willing sellers to Houston-based Landmark Industries. review of any out-of-the-ordinary cir- is a better lending situation. “The banks Laval, Quebec-based Circle K did well in cumstance that might have influenced tend to be lending now and asking for two markets, taking 33 in Louisiana in a store’s cash flow. This year, unusually lower loan-to-value percentages,” Turpin August and a whopping 322 in Southern high gas margins influenced some mar- says. “I’ve heard some folks talk about California in the spring. kets, Woodman says. Stores that have 75% or 80%; that’s not been the case for 7-Eleven met with success in Florida just opened may need more time to fully many years, at least pre-banking crisis.” and New York state earlier in the year, realize the potential of the site. And stores For smaller, regional players, financing garnering 183 ExxonMobil sites and the that come with the retail property trade actually remains a challenge, Woodman 188-store Wilson Farms, while a heated at higher multiples than leased locations. says. For lenders, a new limit exists for how bidding battle for bankrupt Gas City much they’ll fund. “If someone is paying assets in Chicago brought in Houston- Improved Lending a high multiple, say 5x-7x, the bank may based Marathon-Speedway as a winning Hand-in-hand with improved multiples only give you 3x-4x,” he says. “The rest has bidder for a multiple, sources say, that

64 CSP October 2011 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, Vic- tory 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 Fightin’ Words: Respondents to a CSP Daily News poll cited QuikTrip as the chain they’d least like to compete against. Cleveland’s EZ Energy USA, as well as vet- eran companies such as Delek/MAPCO in Brentwood, Tenn. Also, Mechanicsville, Farm Stores, York, Pa., whose own chain company into a brand-centric one with Va.-based GPM Investments—with its is growing in this way, says, “I don’t see foodservice at its core. Indeed, if anything, Fas Mart/Shore Stop chain—recently … our company acquiring those older this longtime M&A specialist has reversed announced a new $50-million credit assets. I don’t see a future for them.” course, putting more than 100 sites on the facility that will launch another phase of The question then becomes which market. (See news story on p. 22.) reinvestment and acquisition. business model will win. Arguably, The The c-store business is essentially Of course, no discussion of growth moving in a different direction than the would be complete without talk of aging major-oil infrastructure that still regional players expanding via new “If you wait too long, exists. “The majors learned as well that builds. Just about all the big names— people better capitalized the c-store operation is so hard to do Tulsa, Okla.-based QuikTrip with will be taking your from a corporate office and be successful,” growth efforts in the Carolinas; Sheetz business rather than says PMAA president Dan Gilligan. “You of Altoona, Pa., in Ohio, North Caro- buying [it].” can’t sit in Houston and decide what salty lina and West Virginia; Wawa of Wawa, snack to sell in Maine.” Pa., in Florida; and West Des Moines, Pantry stands out as an example of what But dealer ranks continue to swell as Iowa-based Kum & Go in Cedar Rapids, needs to happen once the acquisition fuel distributors figure out how to make Iowa, and Arkansas—all have made bold, strategy hits a turning point. With Terry the equation profitable, says Kelso of aggressive moves in the past year. Their Marks announcing his departure as com- Matrix. “We really work in one industry, focus: new builds. pany leader, his two-year legacy is largely the petroleum distribution and c-store Scott Hartman, CEO of Rutter’s an effort to turn an acquisition-focused industry,” he says, “with many moving

CSP October 2011 67 into the terminal business … and many 50s and 60s have to seriously reflect on Bassell of MACS sees the same picture. understanding the value … of distribu- what they have to do to stay competitive, “We’re actively out there in the market tion and logistics.” Kelso says, “or if it’s time to move to the looking for deals, and not the deals you Deals along these lines include Delek’s next phase of their business lives.” see posted on websites,” he says. “A lot of purchase of a refinery and transport assets this past spring, as well as Mara- thon’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 foodser- vice, 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.”

“We see an oversupply in below-average assets and real demand for higher- quality assets.”

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 inde- pendent 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

CSP October 2011 69 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 & says Woodman of Morgan Keegan. About Capital Advisors, Chicago. “It allows people to cash out on their investment,” he $450 billion in middle-market debt will says, citing how investment firms that back c-stores may decide after a certain point mature between now and 2014, he says: to do an initial public offering (IPO). “So if you’ve got a c-store operator that Others do it to generate cash. That may be the case for Dallas-based 7-Eleven. financed debt over time in a robust [lend- Two franchisees who are well-established in the system tell CSP they’ve been ing] environment, they’re not going to be 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 able to replace that debt—or [lenders] part of that reason. will, but they just won’t replace it with Publicly, company officials have cited the need to grow their numbers as a way what’s now in place.” 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 Brave New World viable, according to sources who spoke to CSP under condition of anonymity. With the dust settling on this latest round An IPO may be a way for the company to further its mission. Officials with 7-Eleven declined comment. of industry M&A, the winners are emerg- ing, with those left curious about how the market will change. it is generational turnover, people who wait too long, people better capitalized In a CSP Daily News poll, retailers want to do something, annuitize for their will be taking your business rather than seemed less concerned with the change- heirs and not hold onto their business.” buying [it].” over of traditional oil-company assets as Businesses are also fluid. Kelso’s advice Yet another impending hurdle for they were with the intrusion of regional is to sell when trend lines are up: “If you many companies will be debt refinancing, players with their new builds. In the poll,

70 CSP October 2011 “[At 8x], you’re trading on what it’s going to be in a couple of years … 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.” taken in late August, 36.7% of the 234 home eight years ago “and they still use fic—and by the way, they have a strong respondents named QuikTrip as the the same roller grill.” fuel price too.” competitor they’d least like to enter their That type of change has decidedly less No one disagrees that a new, foodser- market. Sheetz came in second at 18.4%. impact than what Bishop describes as the vice-focused, power-buying, well-run (See chart on p. 62.) second type, one involving new entrants. store will beat out an older asset. Opening Their fear has solid footing, says David “QuikTrip is one of those you really don’t one across the street from an older store Bishop, an industry consultant with want to have enter your market,” he says. would certainly hurt volumes. But every- Barrington, Ill.-based Balvor. There are “They’ve learned how to enter and pen- one agrees that these older assets still have essentially two types of market change- etrate new markets.” value, and what’s really occurring now overs, he says. One happens when an Competitors such as QuikTrip, he is that buyer and seller expectations are acquirer comes in and essentially does says, will price coffee at 29 cents per cup, starting to line up. a facelift on sites, including new paint, promote it in stores and billboards all “The companies that keep their focus signage and logos. Typically the acquirer over town and keep that price for six to on customers, growing same-stores sales is already in the market, and whatever nine months. “It’s very hard for a retailer and managing expenses will be success- brand equity the new owner has transfers with established share to respond in a way ful,” Susser says. “Some grow with M&A, to the purchased location. that can defend that customer,” Bishop some through new-store growth and One industry source, who preferred says, citing how competing against a some with both—and some companies not to be named, said one industry con- newly built, state-of-the-art location is just don’t grow. There’s a lot of ways to solidator took over a c-store next to his tough enough. “They’ll do it to drive traf- skin a cat.” n

72 CSP October 2011