Convenience Store Acquisitions Update – October 2023

Convenience Store Acquisitions Expected to Intensify as Large Strategics Complete Recent Integrations

The convenience store operating model has proven to be robust throughout the various stages of the economic cycle—garnering predictable and reoccurring consumer spending amid both healthy and uncertain macroeconomic backdrops. However, adverse economic environments have presented challenges to sector players and those with scale, expansive store counts, and customer loyalty have often outperformed those with lower store counts and less durable margins. Sector participants have become accustomed to contending with an inflationary environment and a potentially higher-for-longer interest rate regime, which has allowed for a steady flow of convenience store acquisitions. The dual profit center profile of convenience store owners, between in-store sales and fuel sales, is unique among Consumer industry players and often allows operators to make tactful adjustments that can insulate them from broader headwinds.

Through year-to-date (YTD), the reckoning of consumer spending that was anticipated to derail the economy has yet to materialize, pointing to the resilience of the U.S. consumer. The Convenience Stores sector has continued to experience steady demand, evidenced by the significant outperformance of large public companies in the space. As large strategic players have leveraged healthy cash positions to scale operations, the Convenience Stores merger and acquisition (M&A) market has flourished despite a slowdown in broader transaction markets. Moving through year end and into 2024, public markets are expected to continue to reward best-in-class operators, which is likely to have valuable trickle-down effects to middle market players exploring a liquidity event.

Convenience Stores Sector Captures Substantial Returns, Outperforming Broader Equity Markets

Large public companies in the Convenience Stores sector have garnered healthy returns through YTD 2023 as investors have sought defensible companies amid persistent macroeconomic headwinds. Notably, Casey’s General Store (Nasdaq:CASY), Murphy USA (NYSE:MUSA), and Alimentation Couche-Tard (TSX:ATD) have seen their stock prices increase by 24.3%, 23.7%, and 18.3% YTD, respectively—far outpacing the S&P 500’s appreciation of 12.8%. As the stock prices for the main three public players have approached 52-week highs, valuation multiples have also followed suit. The average EBITDA multiple among Capstone’s Convenience Stores index rose to 9.6x EV/EBITDA as of September 2023, compared to 8.9x EV/EBITDA in the prior year. Casey’s General Stores has led pricing at 12.0x EV/EBITDA, setting a high-water mark for the space and providing valuation tailwinds to private operators pursuing a sale.

While the Federal Reserve and everyday consumers may balk at the prospect of crude oil approaching $100 per barrel, convenience store operators have become accustomed to and highly skilled at traversing volatile energy price environments. Looking back at the first half of 2022, the average price of retail gasoline rose to $4.19 per gallon while fuel margins among public sector participants expanded meaningfully. Notably, Casey’s General Stores and Alimentation Couche-Tard each experienced an excess of 27% fuel margin appreciation year-over-year (YOY), in their fiscal year Q1 2023 (period ending July 31, 2022 and July 17, 2022, respectively), according to their earnings releases.^{1, 2} In addition, Casey’s recorded a 31.4% increase to total fuel gross profit, despite fuel gallons decreasing 2.3% on a same-store basis. While high fuel prices often negatively impact the volume of fuel gallons sold, sector players have often been able to offset this with increased profitability.

Market participants expect fuel margins to normalize in the coming quarters relative to record-high levels across the sector in early 2022, although they may remain elevated compared to pre-pandemic levels. This has started to appear in profitability levels through the first half of 2023, with Casey's and Murphy USA reporting a YOY decline in fuel margin, according to their earnings releases.^{3, 4} Both reported YOY increases in total retail gallons sold as the average retail gas price fell to $3.59, according to the U.S. Energy Information Administration.⁵ However, their Canadian counterpart, Alimentation Couche-Tard reported record U.S. fuel margins of 50.05 cents per gallon, reflecting favorable market conditions and supply chain optimization, according to its most recent earnings release.⁶ As crude oil prices have continued to trend higher in recent months, convenience store operators of scale may see benefits to top line growth as lower volumes are offset by higher prices.

We expect M&A activity in the sector to remain robust as the industry continues to demonstrate strong defensibility and large strategics are flush with cash. However, there are important differences compared to the boom times of 2021—namely, the cost of capital has increased significantly, and there is a greater emphasis on the location, quality, and size of the store footprints.

Jesse BetznerSenior Director, Capstone Partners

Strategics Drive Convenience Store Acquisitions through YTD 2023, Financial Buyer Interest Grows

M&A volume has slightly outpaced prior year levels through YTD 2023 with 35 transactions announced or completed, marking a 6.1% YOY increase. Transaction volume in the sector has significantly outperformed broader M&A markets which have seen YOY declines of 25.1% in YTD 2023, according to Capstone Partners. While high quality, small store count operators have continued to garner buyer interest, acquirers have favored scaled operators in attractive geographies. This has been evidenced by the average store count of target companies increasing to 50 stores, substantially above the 2022 average of 23 stores. As sector players contend with an elevated cost environment, larger players that can leverage economies of scale are able to withstand higher operating expenses more effectively than smaller operators.

Strategic buyers have continued to drive transaction activity approaching the close of Q3, accounting for 91.4% of YTD deal volume. Casey's General Stores has led recent strategic dealmaking, having acquired 26 Kansas City Minit Mart locations in June for an undisclosed sum. More recently, Casey's acquired 63 convenience stores from EG America operating under the Minit Mart and Certified Oil banners (August). Terms of the transaction were not disclosed. Further consolidation is expected to be driven by Casey's, which currently has 125 stores under agreement to acquire, inclusive of the 63 stores from EG Group, according to its most recent earnings release.

Dealmaking is expected to intensify towards the end of 2023 and into Q1 2024 as large strategics complete integrations of recently announced acquisitions. The additions of large store count chains take time for operational synergies to be realized, often consuming corporate development efforts. Notably, Majors Management and Alimentation Couche-Tard agreed to acquire MAPCO Express in April for an enterprise value of $725 million, with Alimentation Couche-Tard gaining 112 fuel and convenience store sites of MAPCO Express. Since then, Alimentation Couche-Tard has announced one acquisition, the purchase of Dion's Enterprises, a modest 11 store count acquisition. As large strategics work to close and integrate consolidations from earlier in the year, bandwidth should emerge for a resumption in M&A opportunities. Sector participants have the balance sheets to pursue acquisitions—many of the limitations have to do with a lack of inventory in deal markets, which bodes well for middle market operators contemplating an M&A process.

Financial buyers have increasingly eyed the Convenience Stores space as an attractive place to deploy capital. The sector's recession resilience, defensible margins, and ability for buyers to manufacture growth through acquisition have drawn many sponsors and other institutional investors to the space. Notably, FJ Management, the parent company of Maverik, completed its acquisition of Kum & Go and Solar Transport in August (transaction terms undisclosed). The transaction bolstered Maverik's store count to over 800 locations across 20 states, according to a press release.⁷ Financial buyers are expected to continue to pursue the Convenience Stores sector, particularly as many other areas of the Consumer industry have seen a slowdown in sellers coming to market. While strategics benefit from synergies through acquisition, private equity firms have been attracted to the combined value proposition of acquiring an attractive business with healthy cash flows and strong prospects for future growth, as well as the underlying real estate that provides optionality. Higher interest rates are likely here to stay in the near-term, and financial buyers are expected to focus on proven businesses that can be scaled efficiently to drive value upon an exit.

To provide an update on your business or learn about Capstone's wide range of advisory services and Convenience Stores sector knowledge, please contact us.

Connor McLeod, Vice President, was the lead Market Intelligence contributor to this article.

Endnotes

1. Casey's General Stores, "Casey's Announces First Quarter Results," https://investor.caseys.com/press-releases/press-release-details/2022/Caseys-Announces-First-Quarter-Results/default.aspx, accessed September 26, 2023.

2. Alimentation Couche-Tard, "Q1 2023 Quarterly Report," https://couchetard.wpengine.com/en/investors/financial-information/financial-reporting/, accessed September 26, 2023.

3. Casey's General Stores, "Casey's Announces First Quarter Results," https://investor.caseys.com/press-releases/press-release-details/2023/Caseys-Announces-First-Quarter-Results/default.aspx, accessed September 26, 2023.

4. Murphy USA, "Murphy USA Inc. Reports Second Quarter 2023 Results," https://ir.corporate.murphyusa.com/investor-relations/news-releases/press-release-details/2023/Murphy-USA-Inc.-Reports-Second-Quarter-2023-Results/default.aspx, accessed September 26, 2023.

5. U.S. Energy Information Administration, "U.S. All Grades All Formulations Retail Gasoline Prices," https://www.eia.gov/dnav/pet/hist/LeafHandler.ashx?n=pet&s=emm_epm0_pte_nus_dpg&f=m, accessed September 25, 2023.

6. Alimentation Couche-Tard, "Q1 2024 Quarterly Report," https://couchetard.wpengine.com/en/investors/financial-information/financial-reporting/, accessed September 26, 2023.

7. Kum & Go, "Maverik – Adventure’s First Stop – Completes Acquisition of Kum & Go and Solar Transport from Krause Group," https://www.kumandgo.com/maverik-adventures-first-stop-completes-acquisition-of-kum-go-and-solar-transport-from-krause-group/, accessed September 26, 2023.