By Erin Rigik, Senior Editor and John Lofstock, Editor-In-Chief
JCP Investment Management Group on Dec. 22, a significant shareholder of CST Brands Inc., became the second shareholder to put pressure on CST Brand’s CEO Kim Lubel and CST’s Board of Directors in a public letter to explore opportunities from strategic buyers.
JCP Investment Management LLC (JCP), Josh Schechter and Brad Radoff collectively own approximately one million of CST Brand’s outstanding shares.
JCP outlined a number of its concerns about CST, including below-industry average merchandise margins; sub-optimal returns on new store builds and related concerns about significant planned CapEx; stagnant merchandise same-store sales relative to peers; mismanagement of CrossAmerica, including distribution coverage ratio that has declined to an unsustainable level; slow growth and unclear foodservice strategy; and a staggered board without adequate shareholder representation.
JCP noted that “the risk of achieving the 2020 vision and the upside to that vision should be compared to the immediate value that could be realized in a strategic sale. We strongly believe that there would be significant interest in CST from strategic buyers and the Board should explore and consider the opportunities.”
The letter from JCP follows on the heels of a public letter from Engine Capital to CST Brands that was posted on Dec. 9.—less than two weeks ago. Engine is also a shareholder of CST Brands Inc., with ownership of approximately 1% of the outstanding shares. Its letter also urged CST Brands to consider a sale or take steps to improve profitability.
Wells Fargo Securities’ Senior Analyst Bonnie Herzog weighed in on the letter from Engine: “After reviewing Engine Capital’s letter, we broadly believe their thesis is sound, and their arguments should be seriously considered.”
Old Concerns, New Realities
It’s issues very similar to this that lead many Big Oil companies to get out of the retail business. Several current and former c-store executives privately indicated to CSD that they fear some of CST’s leadership team continues to maintain Valero’s Big Oil mentality when it comes to retail operations. CST was spun off from Valero in 2013 and went on to acquire several traditional convenience store chains that have deep roots strictly in retail, such as Nice N Easy and Flash Foods. In the case of Nice N Easy, the company founded by the late John MacDougall, few executives decided to join CST following the sale, leaving the retail direction to CST.
Some continue to maintain that it is hard for a large company like CST to maintain that special relationship with local customers at which Nice N Easy excelled.
Steven Montgomery, president of b2b Solutions, said acquisitions and expansion often brings great expectations. “The industry has entered a new period of consolidation partly driven by companies utilizing a MLP (master-limited partnership) structure,” he said. “This coupled with higher than historic fuel margins has resulted in greater than historic multiples, which has not only raised the expectations of potential sellers, but the stock market as well.”
While the CST Brands team has a wealth of oil industry experience, it is still a rather new company, Montgomery pointed out. “The comparison companies used by Engine (Alimentation Couche-Tard, Casey’s General Stores Inc., Speedway, Sunoco LP) are well established brands who have long histories in the industry.”
Montgomery noted while that may make the comparisons seem unfair, the stock market runs on “perceived value.”
“Engine (and now JCP) has provided its view of CST’s value and in doing so may have altered the perceptions of its shareholders and possible acquirers,” Montgomery said.
CST, much like The Pantry before it, has grown quickly through multiple acquisitions.
“Many of the chains that have grown through acquisition appeared to do so for growth sake similar to the bubble the industry experienced several years ago when securitized lending was the rage,” Montgomery said. But he added there are some differences between CST’s method and that of The Pantry.
While The Pantry grew through acquisition, it did not integrate many of the companies it bought. Even as it added new stores, it continued to use the same information systems and marketing practices. Late in the game, the Pantry began a program looking to address the many different operating methodologies. “But by then it was too late,” Montgomery said.
By contrast, CST Brands appears to be incorporating the best practices of its acquisitions, Montgomery noted, but “unlike Circle K, which has built a retail integration machine over a period of time, CST is relatively new at the retail acquisition game,” he said.
CST Brands, at presstime, had yet to comment on either letter. A report from The Street, after the Engine Capital letter, suggested several c-store chains had expressed interest in acquiring CST Brands, and that if the company didn’t sell, there is a good chance of a proxy war as the time to nominate directors to the board begins in March.