Fuels Distribution and Convenience Retailing M&A Activity in 2023: Setting the Story Straight

February 15, 2024

By: Vance Saunders, CPA, Managing Director & Alex Rakos, Senior Analyst
Downstream Energy & Convenience Retail Investment Banking Group

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There has been much discussion in the media about the decline in mergers and acquisitions (“M&A”) across most sectors of the economy over the last two years. However, hidden within the broader analysis is a robust M&A market for fuels distribution and convenience retailing (“FDCR”) companies (comprised of wholesale fuels distributors, fuels retailers, and convenience retailers) that has not followed the recent broad market trends. In fact, the M&A market for FDCR companies is quite healthy, and valuations remain very compelling for both sellers and buyers.

North American M&A Activity
Similar to the trends observed in the global marketplace, North American M&A activity has continued to decline from the peak levels witnessed in 2021 due to rising costs of capital and economic uncertainty. North American deal counts for all sectors in 2023 were 11% below 2022, with deal value falling by over 13%. Compared to 2021, the deal counts and deal values for all sectors in North America in 2023 decreased by approximately 20% and 35%, respectively [1]. This significant decline from the 2021 levels is partly attributable to factors that drove record M&A activity in the U.S. in 2021: 1) the changes that were proposed to the U.S. tax code in 2021 that drove many sellers into the market to avoid potential tax increases in 2022, and 2) the anticipation of interest rate increases to combat rampant inflation. Fortunately, there were no changes to the tax code, and the broad M&A market remained strong in 2022, despite the steadily rising costs of capital.

M&A activity across most sectors continued to decrease in 2023 due to rising interest rates as well as the tightening of credit markets, even with near record $1.4 trillion of global private equity dry powder and record U.S. corporate cash holdings of over $4.1 trillion [2]. While most industries saw significant declines in M&A deals, the reduction in activity varied by sector as illustrated below.

Fuels Distribution and Convenience Retailing M&A Activity
Despite the headwinds facing the FDCR industry and the macroeconomic forces driving down M&A in other industries, M&A activity involving FDCR companies has remained extremely robust, as illustrated in the chart below. Similar to other industries, the record setting 59 transactions in 2021 resulted from a number of transactions being pulled forward stoked by fear of significant federal income tax increases that never materialized. However, unlike the sector trends in the table above, deal activity in the FDCR industry increased significantly in 2023. Deal counts for FDCR companies increased by 35% from 2022 in spite of interest rates rising to a 20-year high, underscoring the unique factors driving consolidation in the industry.

FDCR Transaction Valuations Remain Strong
Valuation multiples across most industries also declined as a result of lower leverage ratios and increased costs of capital. The median EV/EBITDA (Enterprise Value/Earnings Before Interest, Taxes, Depreciation, and Amortization) transaction multiple for all sectors declined by 1.7x, or 15%, from 2021 to 2023 [3]. However, transaction multiples for FDCR companies have not declined significantly during this same timeframe. Because many transactions in the industry are private and details on financial terms are not publicly disclosed, there is no publicly available source of data to measure trends in EV/EBITDA transaction multiples for FDCR companies. However, the EV/EBITDA valuation multiples for publicly traded companies in the industry typically follow similar trends as M&A transaction multiples, although the magnitude of the changes and the actual multiples are different between public company valuations and M&A transactions. The chart below compares the median M&A transaction multiples for all sectors as well as the energy sector to the public company valuation multiples for retail and wholesale companies in the FDCR industry. As illustrated in the chart below, FDCR public company valuation multiples have changed very little over the last two years, which aligns with what Matrix has observed in FDCR transaction multiples in this time frame. Additionally, M&A transaction multiples based on trailing EBITDA for FDCR companies are typically higher than public company valuation multiples due to the control premium in a company acquisition, as well as the synergies that can be achieved by the acquiror post-transaction.

It is also crucial to remember that EBITDA (as a proxy for operating cash flow) is the primary driver of valuation for FDCR companies. Although multiples have remained fairly steady, company valuations, in terms of dollars, in the industry, both public and private, are higher due to the strong performance and higher EBITDA of companies over the last few years. Sustained, higher fuel margins and the increased gross profit contribution from c-store sales have more than offset rising operating costs, delivering record profitability across the industry. The higher levels of EBITDA have resulted in increased enterprise values for companies even though the implied multiples have varied only slightly.

For example, see the chart below showing the combined enterprise values of select public, FDCR companies along with the weighted average EV/EBITDA valuation multiple. Although the average valuation multiple is nearly unchanged from 2021, enterprise value has increased significantly over the last three years.

Factors Driving M&A in the FDCR Industry
There are several reasons why transaction activity and valuations in the FDCR industry have outperformed other sectors. These reasons can be broken down into the factors driving activity and the factors driving valuation, although many of these factors contribute to both valuation and activity. Certain key factors are summarized below.

Factors driving M&A activity for FDCR companies:

The industry is mature, and growth in many markets is derived either from taking market share from competitors, building new-to-industry stores (which have become much more expensive to build), or through acquisitions.
The industry remains highly fragmented and dominated by privately held companies with aging ownership and no succession plan.
While interest in the industry from private equity groups has increased, private equity investment remains low relative to other sectors where private equity drives more transaction activity.
Companies that plan to stay in the industry need to grow to remain competitive, and there are many well-capitalized potential buyers hungry for acquisitions.
Declining fuel demand is forcing many companies to make significant changes to their operating models, and many business owners are opting to let someone else make that investment.

Factors driving valuation for FDCR companies:

The industry has historically proven to be recession resistant, so the threat of an economic downturn does not impact valuation as much as other industries.
Industry profitability has been at record levels over the last three years, and the higher fuel margins once thought to be fleeting have proven to be sustainable.
As mentioned above, M&A activity is not dominated by private equity investors who rely on heavy debt leverage at low interest rates to increase their equity returns. Instead, industry M&A is dominated by strategic companies with strong balance sheets that have been bolstered by increased cash flows over the last few years.
Given the length of time it takes to achieve significant organic growth through construction of new-to-industry sites, many companies seek growth via acquisition as a much quicker means to achieve growth and scale. Competition among potential buyers for quality assets remains very high, keeping valuation multiples from falling as witnessed in other sectors.
Tax policies for M&A are still extremely favorable, particularly for FDCR companies given the favorable depreciation provisions available to marketers owning or acquiring depreciable real property. Certain provisions of the Tax Cuts and Jobs Act of 2017 are sunsetting over the next few years, and without new legislation to extend the current tax provisions, this may also be a factor driving transaction activity in 2024 [4].
FDCR companies have become much more sophisticated, particularly convenience store companies that have developed strong proprietary store brands with differentiated value propositions for their customers. Synergies from process and product improvements as well as margin improvements from economies of scale are being achieved by more companies as they grow, particularly with fuel procurement. This helps support transaction values for sellers as buyers are able to pay a higher multiple of sellers’ EBITDA knowing they will have synergies post-transaction. Buyers are able to achieve lower transaction multiples post-synergies even if the multiples based on sellers’ EBITDA remain unchanged or even increase.
The amount of synergies that can be achieved by strategic acquirers in the FDCR industry are well in excess of the expected synergies for transactions in other industries, and the synergies achieved in FDCR company transactions have helped offset the increased costs of capital for the buyer.

Conclusion and Outlook for 2024
M&A transaction activity and valuations have remained much stronger in fuels distribution and convenience retailing than other sectors of the economy. We continue to see aggressive competition from strategic acquirers for high quality targets in our current sell-side engagements. For 2024, we expect the number of deals to increase and valuations to remain stable absent any major legislation impacting tax rates or a major economic downturn. Interest rates are anticipated to decline at some point this year, while the economy so far has remained strong. Falling interest rates combined with the near record levels of private equity overhang and the record amount of corporate cash balances will help fuel M&A activity across all sectors in the year ahead, and FDCR M&A will continue to outperform given the unique factors affecting the industry.

About Matrix Capital Markets Group, Inc.
Founded in 1988, Matrix Capital Markets Group, Inc. is an independent, advisory focused, privately-held investment bank headquartered in Richmond, VA, with additional offices in Baltimore, MD and New York, NY. Matrix provides merger & acquisition and financial advisory services for privately-held, private-equity owned, not-for-profit and publicly traded companies. Matrix’s advisory services include company sales, recapitalizations, capital raises of debt & equity, corporate carve-outs, special situations, management buyouts, corporate valuations, and fairness opinions. Matrix serves clients in a wide range of industries, including automotive aftermarket, building products, car washes, consumer products, convenience retail, downstream energy, healthcare and industrial products. For additional information or to contact our team members, please visit www.matrixcmg.com.

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[1] Source: Pitchbook
[2] Sources: Pitchbook; The Cafang Group
[3] Source: Pitchbook; Geography: North America and Europe
[4] See the recent Matrix CMP on this topic linked here.