NEW YORK: Three years. That’s how long fuel and convenience-store operator CST Brands will have lasted as an independent company, assuming the review of strategic alternatives it started last month culminates in a sale. But to the chagrin of activist investors who are angling for a deal, the universe of potential buyers is shrinking.
With roughly 1,900 locations across the United States and Canada, and best known for its Corner Store brand, CST is a prime target for rival chain owners such as Canada’s Alimentation Couche-Tard, Sunoco and Marathon Petroleum. Even Tokyo-listed 7-Eleven owner Seven & i Holdings has been tossed around by analysts as a potential acquirer, but that looks unlikely considering its chairman and CEO said he’d step down this week.
Sunoco and Marathon Petroleum have seen their shares tumble 19% and 25% this year, respectively, and the declines may douse their enthusiasm for a deal. But the companies, whose affiliated refining operations supply their gas stations, face an even bigger deterrent in the form of Valero Energy.
The refiner spun off CST in 2013 but has a long-term fuel supply agreement that extends through 2028. For context, that amounted to US$6.4bil for all of the motor fuel purchased for resale by CST’s US and Canadian retail segments in 2015.
Plus, even though the company’s current US$2.9bil market value is well within reach for private equity firms with cash at hand, they may stay away due to the company’s relatively expensive valuation (approaching 10 times its earnings before interest, taxes, depreciation and amortisation) and mid-size debt load.
That leaves the US$25bil Alimentation Couche-Tard as the likeliest buyer of CST, a notion it hasn’t dismissed. The Quebec-based company’s chairman and co-founder Brian Hannasch has told Canadian press that it would consider participating in a process for the company if invited, and that it could “probably do a deal that size” if interested.
That’s welcome news for CST shareholders, considering Alimentation Couche-Tard could easily have argued that it has its hands full. It’s working to close a roughly US$1.2bil deal inked last month to buy gas stations from Imperial Oil that came a year after closing its acquisition of smaller US rival The Pantry.
Alimentation Couche-Tard can afford to pay up for CST. Assuming it pays cash of US$44.09 a share or an 11.5 times Ebitda multiple, a deal would be almost 5% accretive to its 2016 earnings per share even without accounting for synergies, according to data compiled by Bloomberg. Believe it or not, a deal is still accretive without synergies if Alimentation Couche-Tard stretches to pay the US$53 that analysts Jefferies believe CST could fetch in an ultimate bull scenario.
Any offer will likely come in below that, considering the obvious lack of competitive tension.
Either way, knowing that the eventual fuel price recovery will put pressure on what have been record margins and the rebound inbroader tobacco sales isn’t expected to last (the segment accounts for nearly 30% of CST’s in-store sales), it’s prime time for a sale.
CST also controls the operations of CrossAmerica, which has another 1,075 stores. – Bloomberg
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