March 29, 2017

Sign of the Times: Prospective Acquisitions and ROI

Prospective Acquisitions

by Scott Barrett, VP Business Development

As I take a minute to ponder current industry happenings, I’m reminded of the lyrics from one of my favorite songs… “Sign, sign, everywhere a sign” (by Five Man Electrical Band). The industry is currently full of signs, especially signs of how it is continually changing. In a recent discussion with a client, I asked what keeps him awake at night. Surprisingly, his biggest concern was whether or not a new acquisition his company had purchased was going to meet ROI requirements.

Prospective Acquisitions: ROI Unknown

For me, this was a true sign of the times for how our industry has changed over the past two years. Record numbers (and sizes) of acquisitions have changed the landscape of the fuel and convenience store industry in undeniable ways. The disappearance of popular retail brands from the consumer’s view is a consequence of many of these acquisitions.

Take GPM Investments LLC, for example. It became one of the largest privately owned companies in the convenience channel back in 2013 after acquiring 263 stores in the Southeast. In March of 2015, GPM acquired 42 Road Ranger convenience store sites and began a rebranding to Fas Mart. And just recently, it acquired Mountain Empire Oil Co. Inc.’s 92 Roadrunner Markets in four states. CSP editor Greg Lindenberg writes that GPM has a "reputation of being one of the most aggressive acquisition engines in the convenience-store industry."

And look at the other laundry list of deals that occurred in 2016: Alimentation Couche-Tard/Circle K, COPEC, 7-Eleven, Sunoco, Global Partners, CrossAmerica Partners, Travel Centers of America, Empire Petroleum Partners, Nouria Energy Corp., GPM Investments, Petroleum Marketing Group, Tesoro Corp., Delek Holdings, First Coast Energy, Northern Tier Energy — to name a few. The list is a good illustration of the fact that the amount and intensity of acquisitions within our industry is at feverish levels with no signs of cooling.

What’s causing all this merger and acquisition activity? To understand the cause, we need to recognize the signs that have been in play for several years. Three in particular come to mind.

  1. Slow global economic growth has kept the cost of capital (borrowing money) at record-low levels for quite some time.
  2. Record fuel margins in the industry for the past few years have made the retail assets very profitable.
  3. The depressed oil price has shifted where large corporations allocate their capital — i.e., you can no longer just dig a hole in the ground and assume you will print money.

Looking at just one of these signs by itself is not all that compelling, but combined, they re-shape the way companies view the fuel and convenience store industry. The record amount of buying has led to record price multiples (the industry views an acquisition purchase price as a multiple of the combined assets’ annual EBITDA). What used to cost maybe 5 or 6 times annual EBITDA is now going for 9 or 10 times! This keeps CEOs and fuel directors up at night worrying about how they will achieve the profit and fuel margins needed to deliver a decent ROI. And that's a reasonable worry, both while entering a merger or acquisition and afterward.

This “sign of the times” has many implications for fuel and convenience retailers wanting to remain profitable. (And which retailer doesn't want that, right?) First, trying to achieve margin plans based on the previous year’s historic margin performance is difficult, but definitely more manageable with automated pricing tools that leverage prescriptive analytics and use historical insights to determine optimal fuel retail pricing.

Second, when marketers are trying to find perfect locations for a potential acquisition, they need expert location analysis to help them find under-performing, but high-potential sites on good real estate. Third, massive acquisitions always involve taking the “bad” sites along with the “good” sites. Retail network planning models that incorporate scenario testing and forecasting capabilities can assist marketers with network rationalization — that is, determining which sites to sell or close and still maintain an optimal market share.

Fuel and convenience retailers who are considering potential acquisitions as a growth strategy need to be vigilant about developing strong, strategic partnerships with business intelligence providers. With the right information on hand, these retailers can understand the impact of the prospective acquisition on the retail network, brand, volume and profitability up front.

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