Marathon Petroleum's(MPC) - Get Report , Speedway, Alimentation Couche-Tard and Energy Transfer Partners' (ETP) Sunoco are among those interested in a potential acquisition of activist-pressured convenience store operator CST Brands (CST) , according to a source familiar with the situation.
Besides an outright sale of CST Brands to one of the large consolidators, the odds of a proxy fight are also high, the unnamed source said, noting that the window to nominate directors opens in early March.
Arnaud Ajdler's Engine Capital on Wednesday delivered a letter to the board of CST Brands requesting that it either take various actions to substantially improve business operations or launch a review of strategic alternatives, including the exploration of a sale.
In addition to Engine Capital, with an approximately 1% stake in CST Brands, the company's shareholder base includes Alan Fournier's Summit, N.J.-based hedge fund Pennant Capital Management and Daniel Lewis' Orange Capital, which own about 4.6% and 3.1% of the company, respectively.
CST Brands, based in San Antonio, is amongst North America's largest publicly traded fuel and convenience store retailers and encompasses more than 1,900 retail locations in the U.S. and Canada under banners that include Corner Store, Depanneur du Coin and Nice N Easy. CST Brands inherited a master limited partnership structure via an Aug. 7, 2014, agreement to buy all the membership interests of Lehigh Gas, the general partner of Lehigh Gas Partners LP, from Lehigh Gas Corp. for $85 million. With the closing of the deal on Oct. 1, 2014, Lehigh Gas Partners was renamed CrossAmerica.
In its Dec. 9 letter, Engine Capital cited the company's underperformance to peers in terms of both stock performance and same-store sales since its spinoff from Valero Energy(VLO) - Get Report , which was completed on May 1, 2013. Specifically, the investor noted that CST Brands' total shareholder return since May 2013 is about 24%, as opposed to Casey's General Stores(CASY) - Get Report , with a 116% return, and Couche-Tard, with a 216% return, over the corresponding period.
Followers of the company suggested Wednesday that the concerns highlighted by Engine Capital have some merit.
"(Engine Capital) is correct in arguing that the stock should be trading higher," Betty Chen, an analyst with Mizuho Securities said by phone, acknowledging that CST Brands has done a good job diversifying out of Texas, among other things, since breaking off from Valero. "Their valuation method is valid."
Added Wells Fargo Securities's Bonnie Herzog in a Dec. 9 research note: "After reviewing Engine Capital's letter, we broadly believe their thesis is sound, and their arguments should be seriously considered. We share Engine Capital's bullish outlook for CST, but equally share investors' frustrations at the lack of performance."
In an outright sale scenario, Engine Capital wrote that a takeout ought to value the convenience store retailer between 11 times and 12 times Ebitda, implying a sale price between approximately $50 and $55 a share.
The activist suggested that the high end of that range would be likely given the "fierce" competition in the sector.
A $55 per share offer would equate to a price tag of about $4.17 billion, based upon CST Brands' about 75.9 million weighted-average common shares outstanding as of Sept. 30, assuming dilution.
Besides Marathon, Couche-Tard and Sunoco, which would all make logical buyers of CST Brands, international players including Japan's Seven & I Holdings. could also be interested in CST Brands, Chen said. Tokyo-based Seven & I has been trying to push into the U.S., she noted.
Should CST Brands choose to remain as a standalone company, it must address various issues if it wants to be "one of the enduring consolidators in the industry," Engine Capital wrote.
Herzog agreed, writing that "in order to facilitate an effective consolidation strategy, CST needs to have a strategic advantage," whether that's by driving operational improvements or via a cost of capital advantage through its MLP partnership.
Specifically, Engine Capital's Ajdler in the letter pointed to CST Brands' need to upgrade merchandise and food service operations to drive same-store sales; improve capital allocation, including raising the threshold for returns relating to its "new to industry" (NTI) stores; and maximize the value of its real estate, potentially through one or more transactions. The activist also outlined the need to evaluate issues of executive compensation; corporate governance and board composition, potentially via stronger independent shareholder representation; and improved communication with investors.
Engine Capital's letter comes on the heels of CST Brands' Nov. 25 agreement to buy Southeast convenience store chain Flash Foods for $425 million, through which it gained a presence in Georgia and Florida.
The company also indicated weeks earlier on Nov. 4 that it has launched a review of strategic options for its California network, which comprises 76 stores.
Prior to Flash Foods, CST on June 15 struck a pair of drop-down transactions for a combined $261 million to its wholesale fuel distributor subsidiary CrossAmerica Partners(CAPL) - Get Report , and separately, revealed a deal to buy a West Virginia retail chain One Stop for an undisclosed price.
In terms of convenience store acquisitions, the One Stop transaction follows CST and CrossAmerica's joint acquisition of 22 Timewise stores from Landmark Industries for $63.7 million in December 2014, which came after its $65 million winning bid for convenience store chain Nice N Easy Grocery Shoppes in November 2014.
Shares of CST, listed on the New York Stock Exchange, closed at $37.35 Wednesday, up 2.2%, assigning the company a market capitalization of about $2.8 billion. CST shares were trading up about 1% on Thursday.
Officials with CST Brands not return calls or emails on Wednesday. Those with Marathon Petroleum, Couche-Tard and Sunoco also could not be immediately reached.