Smokes, al­co­hol trump gas in $21B deal

National Post (National Edition) - - FINANCIAL POST - DAVID WETHE

This year’s biggest energy deal is more about al­co­hol and cig­a­rettes than gaso­line.

7-Eleven owner Seven & i Hold­ings Co. is spend­ing US$21 bil­lion to buy about 4,000 gas sta­tions in the U.S. from Marathon Pe­tro­leum Corp., the lat­est in a long line of oil re­fin­ers ex­it­ing their re­tail net­works. The trans­ac­tion shows how, de­spite the global slump in energy de­mand due to COVID-19 lock­downs, the business of sell­ing fuel is in com­par­a­tively rude health.

Marathon, which is sell­ing the Speed­way chain of sta­tions to re­pay some of its moun­tain­ous debt pile, said Mon­day its mer­chan­dise sales only slipped by 4 per cent in the second quar­ter, while fuel sales plum­meted 37 per cent from a year ear­lier. Amer­i­cans drove less amid the pan­demic, but Speed­way re­ported higher de­mand for cig­a­rettes and al­co­hol dur­ing the pe­riod.

“Gaso­line is nice but the real money is made get­ting peo­ple in­side the stores,” Eric Dz­won­czyk, who heads up the restaurant prac­tice at in­dus­try con­sul­tant AlixPart­ners LLP, said in an in­ter­view.

Seven & i, which op­er­ates the world’s largest chain of con­ve­nience stores, in­clud­ing 7-Eleven, had sought a deal with Marathon ear­lier this year to buy Speed­way, the second-biggest chain of its kind in the U.S. But it hit the pause but­ton after of­fer­ing US$22 bil­lion, Bloomberg re­ported in March, just as wor­ries about the eco­nomic im­pact of the pan­demic were be­gin­ning to grow.

The re­vived in­ter­est from the Ja­panese com­pany came amid con­cerns that Montreal-based Ali­men­ta­tion Couche-Tard Inc., the second-largest con­ve­nience store op­er­a­tor in North Amer­ica, would snap up Speed­way for it­self. Seven & i is aim­ing for scale: The trans­ac­tion will give 7-Eleven a pres­ence in 47 out of the top 50 met­ro­pol­i­tan mar­kets in the U.S. and a com­mand­ing lead in the coun­try’s con­ve­nience-store seg­ment with al­most 14,000 locations in the U.S. and Canada.

“The dis­ad­van­tage of not win­ning this bid would have been other com­peti­tors ex­pand­ing their business,” Joseph DePinto, pres­i­dent of the 7-Eleven Inc. U.S. op­er­a­tion, said dur­ing a con­fer­ence call.

The all-cash offer puts an av­er­age price tag of US$5.4 mil­lion on each Speed­way out­let, which is higher than the roughly US$3 mil­lion­per-store that Seven & i paid for Sunoco’s re­tail net­work in 2018.

Booze, smokes, snacks and other in-store mer­chan­dise ac­counts for roughly two-thirds of over­all gross mar­gins for con­ve­nience-store op­er­a­tors, with the re­main­der com­ing from fuel, according to Matthew Blair, an an­a­lyst at Tu­dor, Pick­er­ing, Holt & Co.

Based on data from 7-Eleven, the val­u­a­tion of the deal equates to 11 times Speed­way’s after-tax earn­ings, a “pretty rea­son­able” mul­ti­ple, Tu­dor’s Blair wrote in a note.

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