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Monday, October 17, 2022

Expect the deals to keep rolling, but transaction prices could decline

Source: OPIS Oil Express
By Donna Harris


LAS VEGAS - Expect the number of convenience-fuel businesses sold to return to the 10-year average in 2022, down from a record year for mergers and acquisitions in 2021, Cedric Fortemps, managing director and principal for Matrix Capital Markets Group, told attendees of a session on M&A at the NACS Show this month.

However, fuel retailers and financial advisors anticipate that higher interest rates will make purchases less economical for buyers. Inflation and higher operating expenses also are expected to decrease earnings, which could lower the EBITDA multiples used for business valuations.

Casey's General Stores Inc., a public retailer closing in on 2,500 stores, is actively pursuing acquisitions, though Brian Johnson, senior vice president of investor relations and business development, told the NACS session that rising interest rates could affect transaction prices. "Investors expect ratable growth year after year," he said.

But with higher interest rates, "the acquirer's cost of capital goes up and requires a higher return," said Johnson. "Down the road, if [the Fed] keeps raising rates, we may not be able to pay as much."

Matrix tracks deals of at least two truckstops, 10 or more stores or at least 25 supply accounts, and last year was a record year, with 55 ''material" deals, Fortemps said. Some 31 deals closed in the fourth quarter of 2021, as sellers hurried transactions to avoid a potential increase in federal capital gains taxes in 2022, he noted.

From Jan. 1 through Sept. 30, there were 21 material deals. That is fewer than 40% of the total transactions in 2021.

The data presented shows that from 2013 through 2021, annual transaction counts ranged from 24 in 2013 to 55 in 2021, with the former high 48 in 2018. A rough average for the 10 years including year-to-date 2022 would be 33 transactions.

The "number [of companies] looking to grow is substantial," Fortemps said.

NRC Realty & Capital Advisors, exhibiting at the NACS Show, was distributing a presentation suggesting that in the near term, business valuations could decline or flatten.

In recent years, interest rates dropped to near zero, inflating asset prices, the report said, adding that "both industry earnings and purchase price multiples have been at record levels."

NRC said it is "difficult to predict," but several factors could hit valuations, such as significant interest rate increases, labor and supply chain issues, concerns about electric vehicles, fewer bidders resulting in less competition, softer real estate values and worldwide economic and political turmoil.

"Buyers are getting increasingly selective and discriminating about their acquisitions and growth strategies," said Jeff Kramer, managing director of NRC. However, NRC does not see much long-term effect on industry valuations. "The industry is more stable than most other retail sectors," Kramer told OPIS.

Mark Radosevich, president of advisory firm PetroActive Real Estate Services LLC, explained in an interview at the show why he expects higher interest rates to lower business valuations.

"As mortgage rates rise, debt obligations will impact P&L performance and buyer equity requirements," Radosevich said. "Hand in hand with that, sale-leaseback cap rates will also rise, impacting rents and reducing the delta between the value where a lease was originated and the cap rate, commensurate to the credit value of the tenant, should the lease subsequently be sold as an investment instrument"

He believes the Federal Reserve will continue to increase interest rates to slow inflation, which will limit the number of qualified buyers.

As a result, "acquisition multiples for 'A and high B' quality stores with modem sizes and configurations will drop below the current high ranges, possibly to [an] 8.0 to 8.5 times EBITDAR range," Radosevich said. "Average 'C category' sites, best destined for a dealer buyer or lessee, will drop back to the 5.0 to 5.5 range."

Despite potential declines in transaction prices, rising operating costs could prompt some operators to sell. An executive with a large retail chain told OPIS some small operators will exit the business, fueling more consolidation.

"The competitive advantage of scale has never been greater," he said. "You have to have scale to keep a lid on cost."


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