Monday, September 25, 2023
Industry M&A Multiples Get Tested
Interest in growth through acquisition remains strong
Source: Observations from the Executive SuiteBy Jeff Kramer, Managing Director, NRC Realty & Capital Advisors
While no one seems ready to suggest that the possibility of a recession has passed, positive factors have coalesced to keep the economy on track as the country nears the fourth quarter of 2023. Strong consumer spending for travel and leisure, plus some improvement in government-inspired and -supported infrastructure and "green" spending for new fuels and electric vehicles are providing positive growth in spite of tight money and high interest rates.
Ironically, consumer spending has held up in part because high prices and credit costs have slowed sales of high-ticket items like housing and cars. Since the consumer comprises 70% of U.S. spending, continued growth is suspect as income growth slows, savings draw down and government support programs expire. These factors will have an impact even in our still very strong convenience-store industry at some point.
The unusual amount of geopolitical conflict and uncertainty worldwide adds to consumer and business uncertainty, at times requiring government support to sustain an economy, which is rarely good except in true emergencies.
The Big Picture
Still, worldwide inflation is slowing, although official statistics don't always show it. In the U.S., it is showing up in home and used car prices. If nothing else, the consumer is getting much more selective and resistant to higher prices. In the global setting, the U.S. remains strong, largely from leadership in technology and our tremendous wealth and independence in natural resources, namely energy and food. But will, or should I say can, the Federal Reserve engineer a soft economic landing? In the past, Fed Chairman Jerome Powell has reacted to each crisis with fast policy reversals, often just temporary Band Aids.
In the meantime, merger and acquisition (M&A) activity has slowed in all industries from higher interest costs and the tightening availability of money. Banks have to keep extra reserves for potential losses, especially on commercial real estate and long-term bonds they own, while their own costs for deposits have increased. Even private equity has been impacted, as the formerly hot IPO market for tech companies has turned cold.
Our c-store/gasoline/restaurant industry remains resilient. Certainly helped somewhat by COVID, the industry has again proven that convenience and time saved are valued by the consumer. And the industry has proven its flexibility and transformational capabilities as it pivots to profitable foodservice programs, both branded and proprietary. Other retail channels and especially restaurants have not been as flexible or fortunate, especially against internet and big-box retailers like Amazon, Walmart and Costco, which have also taken fuel market share from our industry. Fortunately, rising fuel margins have amply offset the volume losses in most regions, helped some by tight refined product supply for now.
Bank on It
The net result is our industry has seen a string of record profit years, with 2023 so far near 2022's record. Banks remain willing lenders at higher rates, and private credit has quickly grown to a more than $1.5 trillion lending alternative, albeit very expensive and restrictive. The environment for the average small or midsized c-store marketer growing through acquisitions or new construction is challenged. Much as in the housing industry, cash bidders on M&A deals, or at least those who do not have financing contingencies, have big advantages as buyers.
Another likely headwind for M&A is the growth of the electric-vehicle industry. Nonunion Tesla keeps growing sales and market share, and even reduces prices leaving the rest of unionized Detroit behind. It seems like Tesla is following the path—in this case, worldwide—of Henry Ford and John D. Rockefeller through scale and integration. Still, it remains unclear how geopolitics will deal with very competitive, well-built EV models from China. More unclear is the public's acceptance of EVs, which is important to our industry since most electric charging will be done at home or in public venues with longer stops like supermarkets or highway locations.
In summary, our industry remains very solid, and M&A purchase interest should remain solid, albeit slowed by financial markets. The net result of all the above-mentioned factors is a softening of purchase price multiples, probably to an unusually wide range from as low as 6.5X cash flow for weaker chains with smaller stores to as high as 9.5X for chains that can compete with new-to-industry locations. As always, purchasers will have savings from scale and potential operational changes that impact their returns on investment and get reflected in stronger bidding interest and multiples.