Wall Street investors are not known for their patience, and after seven years of few public companies in the retail fuel space, all signs point to many more public opportunities to bet for or against c-store chains in 2020.
Coaxed by the activist hedge fund Elliott Management and prodded by other large institutional shareholders, a spin-off of the Speedway retail operations seems all but certain. Confidential sources in the M&A community believe that a traditional spin-off of Speedway could yield between $15-billion and $17-billion in value for Marathon Petroleum shareholders.
There isn’t much history in the spin-space and one has to go back to 2013 when Valero spun off CST Brands and Murphy Oil separated the Murphy USA chain. Both of those deals were motivated by “unlocking” value to shareholders, but the combined initial market capitalization of the two companies was just over $4-billion. Most of CST Brands was sold to Couche-Tard two years ago in a deal valued at $4.4-billion. Murphy USA has more than doubled in value since its debut.
However, the present climate for c-store chains owned and operated by single companies is far superior to what existed seven years ago. Investment banks may look to price shares in a Speedway spin-off at about 11 times EBITDA. Ironically, Marathon set the high bar when it preempted a spin-off by Hess of Hess Retail back in 2014, paying approximately 14 times EBITDA. An aggregator, or even a major oil company, could attempt to do likewise with Speedway, but that deal would have tax consequences and the list of would-be acquirers is quite small.
The final 2019 figures for typical Speedway stores are expected to be between $350,000 and $365,000 per site, and with about 3925 stores, that equates to total “four walls” EBITDA number between $1.375-billion and $1.425-billion. A spin with an eleven multiple implies a stunning debut value between $15.1-billion and $15.7-billion.
Top operators in the c-store space believe that there is plenty of room to improve Speedway. Despite the lofty price paid for Hess Retail in 2014, top brass at the company have concentrated on expansion in refining and logistics, perhaps leaving store improvements for a future date.
Nevertheless, OPIS MarginPro looked at Speedway’s performance and market share in 2019 and ranked the company 21st out of 178 fuel brands in terms of market efficiency. Market efficiency is derived by taking a company’s market share and dividing it by the number of outlets. Speedway had a market efficiency rating of 1.97. Buc-ee’s tops the ratings with a market efficiency number over 7, with Wawa and Sheetz also occupying the high rating space. For perspective, Cumberland Farms, which is now part of EG Group has a rating just above 1.
See which brands are the 10 most efficient and their average price differentials versus their direct competitors, sourced from OPIS MarketSharePro.
Privately, many independent refiners envy Marathon’s integrated downstream model, where they control barrels from the refinery gate to a large portion of retail customers. The worry among North American refiners in the next decade is focused on how to “clear” all of the gasoline produced by upgraded plants, particularly east of the Rockies.
Marathon is likely to craft a long-term supply deal with Speedway, but the terms may get heavy scrutiny. The trend among large retailers with scale has seen many fuel buyers negotiate for large discounts, whether the benchmarks are spot or rack numbers.
Discounting to gasoline retailers in Speedway strongholds, generally through the Great Lakes and Kentucky, has been particularly aggressive in the last two years. Earlier this week, OPIS confirmed double digit discounts off OPIS Low Rack for gasoline buyers in Hammond and Indianapolis, Indiana, as well as in Detroit, Michigan. Discounts are less aggressive in the Southeast and Northeast, and indeed Speedway has bought from other refiners in various locations. OPIS data suggest that the company boasts a market share of around 21% in the Great Lakes, compared to just above 5% in East Coast markets.
A spin of the Speedway retail operations would undoubtedly help Marathon score points with jobbers across many states. Branded and unbranded Marathon jobbers have long complained that they are at a disadvantage when buying rack product from the company, only to face low-ball retail competition from the Speedway subsidiary. Marathon has quietly rolled out an ARCO offering, but in most cases, the brand does not overlap with Speedway territory.
Some observers do not rule out the possibility that an entity will mimic Marathon’s strategy of 2014, and intercede with an offer that obviates a public spin. One name that gets prominent mention in M&A circles is Motiva. The Aramco-owned refiner clearly has designs on more North American refining and has occasionally struggled to find a home for the massive amounts of gasoline and diesel manufactured at the huge Port Arthur, Texas refinery. It holds rights to the Shell brand in Georgia, the Carolinas, Virginia, Maryland, D.C, and much of Florida and has a license for the 76 flag in 26 Gulf and East Coast states.
There has also been talk about BP and Shell getting back into retail but both companies appear focused on overseas growth in mature and emerging markets.
A buyout from an aggregator such as Couche-Tard or EG Group appears to be too daunting, and would be laden with regulatory issues, M&A experts tell OPIS.
EG Group has been reported to be looking at an IPO as early as next year, and Yesway confirmed that it eventually wants to go public once it hits targets for critical mass. Several other smaller ventures backed by Wall Street could head for public markets in the first half of the next decade.
One longtime retailer predicted that the publicly traded value of North American c-store companies could blow past $100-billion within two or three years. That assessment does not assume any IPOs for top private operators like Pilot, QuikTrip, Sheetz or Wawa. The siren song of a big Wall Street payday may lure others into sales if Speedway gets a warm reception.
Speedway’s current headquarters are in Enon, Ohio. Marathon Petroleum is headquartered in Findlay, Ohio.
-- Tom Kloza, tkloza@opisnet.com
Copyright, Oil Price Information Service
