Reshaping the Convenience Landscape

Who Would Benefit?

While smaller operators have a lot to lose, larger regional players have an awful lot to gain.

"For wealthy, financially qualified jobbers, this is a fantastic opportunity," said Tom Kelso, managing director of Matrix Capital, a Richmond, Va.-based investment group that provides merger and acquisition advisory services to convenience store and petroleum companies. "Since these are company-owned properties, we’re looking at good stores in good markets, and, in most cases, Exxon owns the underlying real estate. It adds up to a once in a lifetime opportunity. Once these units are sold it would be almost impossible to duplicate another sale of this size."

Wallis Cos., in Cuba, Mo., and Boston-based Verc Enterprises Inc., are two companies that expressed a serious interest in vying for ExxonMobil’s divested sites. Wallis in particular seems to be a strong fit. The company became a regional powerhouse in 1993 when an acquisition from then Mobil Oil Corp. doubled its c-store and distribution business. The company also is a regional franchise developer (RFD) for ExxonMobil’s On the Run convenience store brand. These types of operators appear to have the first crack at acquiring blocks of stores that could make them among the dominant operators in any given market.

"There is still a lot of information we just don’t have yet, but (the opportunity to acquire ExxonMobil stores) is something we are studying pretty intensely internally," said Wallis Cos. President and CEO Lynn Wallis. "We believe we are well-positioned both in the market from a financial perspective and in terms of our relationship with ExxonMobil to significantly grow our business. Time will tell."

Currently, Wallis has 36 company-operated stores, 19 of which feature the On the Run c-store brand. It distributes to an additional 150 dealer stores.

What interests Wallis the most is the opportunity to grow both sides of the business, retail and distribution. "I understand that a lot of dealers must be concerned about the future of their business right now, but we have several On the Run dealers and our strategy, whether we acquire stores or not, is helping them continue to grow," she said. "Opportunities like this don’t come along very often. When we bought Mobil’s assets 15 years ago it was a transforming experience. Hopefully, it will happen again."

Like Wallis, Leo Vercollone, the president and CEO of Duxbury, Mass.-based Verc Enterprises, welcomed ExxonMobil’s decision and said he’s positioning his company to pounce on stores should they become available.

"I’ve watched ExxonMobil pull out of western Massachusetts, upstate New York, Vermont, Maine and now Boston. This is huge for me," Vercollone said.

Verc Enterprises operates 14 Exxon and six Mobil stores in Boston and recently received permits for its first two On the Run convenience stores. "We have big plans to grow our business. To be able to get another 20 to 25 stores in one shot would accelerate our plans and get us to our goal that much quicker. More importantly, we have been in this market for 35 years. This is where we want to be."

While Vercollone and Wallis remain upbeat about their prospects for expansion, Kelso, of Matrix Capital warned that even if stores were made available to them, financing the deals could be an enormous obstacle to overcome.

"There are definitely companies, specifically distributors and large c-store chains that are financially secure, but the challenge is the credit markets," Kelso said. "There are companies that maybe a year or two ago wouldn’t have had any problems financing a large deal like this. Now there are a number of conditions that are making it tougher to close acquisitions. Deals are still getting done, but the prices people are able to pay are not as high as they were two years ago."

Valuations are still very good, Kelso said, but the loan-to-value advance rate is lower primarily because capital is harder to get. The result is a higher loan rate, mainly because less money is made available toward the value of the property.

However, companies that have good relationships with their banks will find "that’s where the funds will most likely come from," Kelso said. "There are some creative forms of financing, but it is expensive. I would expect a vast majority of deals in this situation to come from the buyers’ existing banks."

Ironically, the tight economic conditions in the U.S. and the potential cost required of one company to buy an entire market of stores provide the most realistic shot Sertbas and Todisco will ever have to own the dirt beneath their stores.

Distributors could find themselves in a situation where they are trying to pay down debt and need to spin off some stores to raise capital. Or there may be some units in areas they just don’t want to operate.

"I have spoken to a couple of distributors that service this market and they were hoping Exxon would first offer the stores to the dealers who, in turn, would sign supply distribution contracts with their local distributor," Todisco said. "This would reduce the capital they would have to post up front and potentially increase their supply contracts."

Sertbas is hopeful that a similar situation unfolds in his market. "The way I see it, the only way I am going to ever own my stores outright is if the distributor that acquires them needs to raise money quickly," he said. "That’s the best case scenario. Worst case, since my real estate value is very high, my own stores are sold right out from underneath me to the highest bidder."

Few could argue the reasoning behind ExxonMobil’s exodus from direct-store operations. While gas at the pumps is now north of $4 a gallon in most states, retailers have been hard-pressed to turn a profit. As a result, there is a greater emphasis on convenience store operations and niche areas like foodservice.

These programs require intense day-to-day management and, quite frankly, are better off when they’re left to local operators who know their markets and their customers. Or as Oppenheimer & Co analyst Fadel Gheit bluntly put it, "I think (ExxonMobil) arrived at the decision that it’s more of a headache than its worth."

Gheit estimated the stations’ margin was between 10 to 15%, roughly one-third of its margin on crude oil production.

Exxon becomes the third major oil company to pursue a similar strategy focusing on wholesale distribution. Shell and BP unveiled similar strategies two years ago.

Karyn Leonardi-Cattolica, Shell’s external affairs retail channel manager, said the majority of Shell stations are now supplied through wholesalers and joint ventures, and that percentage continues to grow.

In 2006, in an effort to enhance its network and increase the growth of the Shell brand in the U.S., Shell decided to focus on a three-part strategy:

Shell’s direct markets that have transitioned to wholesale thus far include Cincinnati; Columbus, Ohio; Denver; Indianapolis; Kansas City, Mo.; Portland, Ore.; and Southern California as part of the sale of the company’s refining and terminal assets to Tesoro Petroleum Corp. Motiva, Shell’s eastern U.S. joint venture with Saudi Refining Co., has transitioned Atlanta; Austin, Texas; Baton Rouge, La.; Birmingham, Ala.; Dallas; Fairfield, Hartford and New Haven, Conn.; New Orleans; Orlando and Tampa, Fla.; Philadelphia; southern New Jersey; and Memphis, Tenn.

Since 2005, Shell has transitioned approximately 1,350 stations and supply contracts to wholesale and now has approximately 1,400 company-owned stations left in a network of more than 14,000 branded stations.

Bill Fry, vice president of operations for BP, said his company’s decision to move to a franchise based model wasn’t as big a leap of faith as one might expect.

"The ampm brand has more than 20 years experience as a franchisor in the U.S. and internationally, so we know the model very well and how to make it successful," Fry said.

While Exxon has yet to say what it will do with its retail development team in Virginia, BP’s retail support team remains quite active and has no plans to slow down.

"An essential part of a brand’s success is the support it receives," Fry said. "We still very much develop and control the offer, which begins with gathering consumer insights and test marketing products so we can refine them and roll out a winning program. We understand that success and support of our network begins here and that can never change."

Sertbas hopes that message spreads to ExxonMobil. "I have spent years building the On the Run brand because I believe in it and my customers trust it," he said. "Now my customers are looking me in the face and saying, ‘What’s going to happen to my favorite store?’ I tell them not to worry because we’ll be here for a long, long time, but I think they can tell I’m a little worried."