As the second half of the year winds down, my mission with this article is to formulate and share a learned opinion as to what the mergers and acquisitions (M&A) picture will look like in 2022 for the c-store and wholesale petroleum industry.
Will buyers, sellers and lenders still be plentiful? Will interest rates remain low, while purchase multiples remain high? Will outside investors continue to view the retail petroleum sector as an attractive investment? What real effect will planned liberal policies have on real estate considerations?
I took the opportunity to interview various pieces of the M&A puzzle at a recent branded marketer conference, hoping that some of the key players would crystallize the picture and make my job easier. No such luck. As such, following is my best attempt to make some sense out of a very confused situation.
At the moment, there is a mad dash to finalize deals before the end of the year, when a period of feared uncertainty will set in. Buyers are inundated with acquisition opportunities to the point that they have to apply the brakes and pass on choice deals in order to digest what they are buying.
Traditional marketers that may have planned to exit in the next few years suddenly advanced their plans in a desire to complete a sale before a threatened host of higher taxes devour what they created over generations.
Buyers and sellers involved in active deals that originated in time to actually close this year seem to be racing toward a cliff — get it done by New Year’s Eve or plummet over the edge into a period of uncertainty. For future deals or those that won’t make the New Year’s Eve deadline, the question is to what degree will M&A activity be dampened by higher capital gains and estate taxes, as well as electric vehicle rhetoric that clouds reality on the importance of petroleum for the well-being of our country.
When queried about their plans for next year, buyers, lenders and equity investors all expressed continued commitment and engagement with no plan to moderate their appetite for deals.
When various limiting factors were mentioned, there seemed to be a general acknowledgement of risk, but that had not yet factored into growth plans. For the moment on the buy side of a transaction, it is business as usual, which will still foster elevated deal valuations.
Buyer & Seller Considerations
On the seller side of the equation, a clear dichotomy exists that, despite these high business valuations, has the real potential of slowing the M&A train. The deliberate and misguided actions of liberal politicians in Washington have the potential to disrupt America’s economic equilibrium and result in many marketers putting off a decision to sell until things hopefully revert to normalcy.
For c-store owner operators, leasing may be the only alternative left to help ensure retention of ingrained business equity, versus giving a large chunk to the government. The potential for significant and costly limitations on 1031 Exchanges necessitates a long-term hold position on the leases for as long as those in government that want to harm our industry continue to run things in Washington, D.C.
For family businesses where cash proceeds were slated to be divided between family members, pragmatic discussions need to take place so all parties understand the rationale for leasing and how rental income will be allocated.
For buyers insistent on owning the real estate, purchase arrangements could be made related to lease terminations and the properties purchased at a predesignated time or under certain circumstances related to future tax law changes.
After all of these considerations, my M&A prognostication for next year is that buyers, lenders and investors will remain bullish, multiples and valuations will remain high, but deal flow will be moderated due to seller hesitancy caused by uncertainty and fear. Deals that do get done will have a higher level of leasing as a primary component of value.
Our next important hurdle is the mid-term elections, when I hope we’re able to vote enough of the liberal politicians out of Washington, D.C., for business normalcy to return. In the meantime, if you are not a member, join your local petroleum marketers association and get involved to help protect our industry. Don’t let someone else do all of the heavy lifting.
The opinions in this column are the author’s alone.