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

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2024 was another busy year for mergers and acquisitions in the fuels distribution and convenience retailing (“FDCR”) industry. Although there were fewer deals completed in the industry than in 2023, valuations remained strong for high quality assets, with several marquee transactions closed or announced during the year. Looking ahead, we anticipate transaction activity will increase in 2025 with valuations remaining strong as demand outweighs supply in the M&A market and energy and tax policies become more favorable for M&A in the industry. In this article, we’ll examine the 2024 activity and discuss the factors that will drive market activity and valuation over the next year.

2024 Year in Review

A look at the historical M&A transaction activity for fuels distribution and convenience retailers over the last 10 years reveals that the number of transactions in 2024 declined by almost 29% from 2023 and was about 18% below the 10-year average. Uncertainty around the outcome of the 2024 elections and their impact on the petroleum industry and tax policy and unfounded concerns that higher interest rates would negatively impact valuations kept some potential sellers on the sidelines for most of the year. Additionally, while inflation tempered consumer traffic and transactions, strong fuel margins drove another year of near record profitability for many companies in the industry, which caused some potential sellers to postpone their exit plans to take advantage of the increased earnings a while longer before a sale. While the number of acquisition targets on the market declined, demand for high quality assets seemed to increase, resulting in more competition for fewer opportunities. As an M&A advisor, in several of our recent sell-side transactions, we’ve seen a significant increase in the number of potential buyers that have submitted competitive offers, although the amount of competition still varies by geography, asset quality, and transaction size. This heightened competition helped keep valuation multiples for quality assets consistent with levels observed over the last few years and kept leverage with sellers, helping them achieve more favorable deal terms.

One interesting aspect of the 2024 deal activity is the breadth of unique buyers that completed acquisitions during the year. There were 27 unique buyers for the 30 deals that closed in 2024, with only 3 companies completing multiple acquisitions during the year for deals that qualify for the activity we track. That compares with 32 buyers in 42 transactions in 2023 and 22 buyers in 30 deals in 2022. Additionally, out of the top 10 most active acquirors for the preceding 5 years, only 3 completed an acquisition during 2024. This is not due to consolidators sitting on the sidelines but rather the increased competition from regional operators for acquisition targets.

A number of large, marquee deals closed in 2024, along with two transactions that were announced in 2024, one of which has already closed, and the other is expected to close later in 2025 once all regulatory hurdles are cleared. Additionally, the industry is watching closely for any developments in Alimentation Couche-Tard’s attempts to acquire 7-Eleven. If such a transaction were to occur, US antitrust regulators would likely require a substantial divestment process, likely resulting in several transactions and creating growth opportunities for many buyers and possible new entrants to the US market from foreign buyers or private equity funds seeking a sizable platform.

Outlook for 2025

We expect transaction activity to increase in 2025 with valuation multiples remaining consistently strong, much like the prior three years. Since the November elections, market sentiment has improved with most participants feeling more optimistic about the future of the industry and the M&A environment moving forward. We’ve seen an uptick in activity from potential sellers exploring their strategic options, and our transaction pipeline at Matrix is as robust as ever at the start of the new year. While there are many factors that we expect to drive transaction activity and valuation in the industry in the year ahead, the most important factors can be summarized below:

Fragmented, mature industry with aging ownership; operational challenges
• Generational issues exist for many business owners who do not have a transition plan, or families may choose a liquidity event to diversify family wealth and pursue the other interests of the next generation.
• Continued wage inflation pressures and the challenges of recruiting/retaining good employees creates operational headaches for owners and can be a drag on profitability.
• Widening gaps in the quality of offerings, operational capabilities, robust loyalty programs and store profitability between larger operators and smaller and mid-sized companies are making it harder for some companies to remain competitive and maintain market share.
• Achieving scale, developing strong store brands, and investments in technology are important to remain competitive in a changing landscape, and many owners are choosing to exit rather than making the significant investments required to revamp their businesses.
• The time and cost to complete a new-to-industry store has increased significantly since the onset of COVID, making it more difficult to generate required returns on investment on new builds and limiting the number of new builds that companies can execute on in any given year.
• Many companies with multiple business lines and/or divisions (e.g., wholesale fuels, retail stores, commercial fuels, propane, etc.) are choosing to divest certain divisions to reallocate capital to the businesses where they have the most favorable competitive advantages and returns on capital.

Fuel volumes and margin trends
• The new Trump administration has moved quickly to roll back Biden era policies that threatened the future of the motor fuels industry, eliminating the electric vehicle mandate, cutting funding for EV charging infrastructure, potentially eliminating the federal tax credit for electric vehicles, and reevaluating the corporate average fuel economy standards for new vehicles.
• However, with the average age of the fleet of US cars and light-duty trucks at an all-time high, motor fuels gallons are expected to continue to decline as older vehicles are replaced with newer, more efficient ICE vehicles and EVs make up a larger share of the market. Further, most automobile manufacturers remain committed to a future of producing hybrid and pure EV light-duty vehicles, regardless of the current legislative leanings.
• National average gasoline fuel margins for 2024 were the second highest on record at 39.7cpg, up slightly from 2023’s average of 39.4cpg, and a few pennies shy of 2022’s record of 42.9cpg[1]. While margins vary by geography and retailer, it’s become widely accepted that margins retailers have experienced over the last few years are the new normal. Fuel margins are expected to continue to increase consistently with historical trends as the increased margins are needed to offset inflationary operating expenses and reduced fuels volumes, especially as inside sales and gross profits are not keeping pace for many operators. As declines in fuel volumes and tobacco sales, coupled with rising operating expenses, continue to increase the breakeven fuel margins for marginal operators, more sophisticated operators will continue to see bottom line benefit from higher margins.

• Energy policy under the Trump administration that favors more domestic oil and gas production should help keep fuel prices stable over the long term. However, tariffs on Canadian crude and other materials could have an inflationary effect on refined products prices as well as the prices of other goods, and fuel gross profits could be impacted if consumers are squeezed by more cost inflation.

[1] Source: Oil Price Information Services, LLC

Tax policy that is favorable for both buyers and sellers
• The Trump administration is seeking extensions for certain provisions of the 2017 Tax Cuts and Jobs Act (TCJA). The most important provision for the fuels distribution and convenience retailing industry would be the reinstatement of 100% bonus depreciation for qualified assets in the year of acquisition. The TCJA bonus depreciation has been phasing out in 20% increments over the last few years, currently at 40% for 2025. Sellers benefit from higher bonus depreciation because buyers can pay more for an asset while achieving the same after-tax returns, and buyers benefit from the larger cash returns from a higher tax shield in earlier years of an investment.
• Trump is also proposing to make permanent the current top individual income tax rate of 37%, which is scheduled to reset in 2026 to 39.6%, as well as the current estate tax unified credit of almost $14MM, which is set to drop by 50% next year absent changes to the tax code. The Qualified Business Income deduction is also set to expire this year and is part of the proposed extensions.

Demand for acquisitions remains very strong, with several factors bolstering valuations
• There are many companies with aggressive growth goals, both public companies and regional operators. One only has to read some of the public company earnings releases to note the growth aspirations of some of the larger consolidators, and we continue to see robust buyer interest from regional marketers involved in our sale processes.
• With the costs and project lead times continuing to increase for building new-to-industry stores, many companies view acquisitions as faster, less expensive, and often less risky for achieving growth targets than building new stores.
• Strategic buyers have significant synergies when acquiring other companies in the industry, and as consolidation continues, more regional companies are achieving the sophistication and scale to take advantage of higher levels of synergies to compete with large consolidators for acquisitions.
• Buyers have healthy balance sheets from several years of strong cash flows, and there is plenty of debt and equity capital available for acquisitions.
• Refiners are aggressively pursuing ways to secure guaranteed throughput of branded gallons for their refined fuel long term. Their willingness to pay marketers significant amounts through up-front funds or rebates over the life of the contract or enter into joint venture agreements or invest other forms of capital to help grow downstream businesses willing to commit to their brand has been helpful to acquiring marketers willing to partner with branded refiners.

Conclusion

Based on the factors driving M&A activity, we expect transaction volume to increase in 2025, with valuation multiples remaining strong and within or above the range observed over the past three years. While multiples have been fairly flat, company valuations are higher due to the increased EBITDA businesses are able to generate, creating an attractive exit point for sellers. While changes in interest rates and tax policy are not certain, any declines in costs of capital or increased tax benefits that would otherwise drive valuations higher may be somewhat offset by having more transactions in the market to lessen the supply/demand imbalance. Companies with high quality assets will continue to garner premium valuations, while lower-tier assets may get less attention in the marketplace as they compete with other sellers for buyers’ capital allocations. It’s also possible some new platforms will be created in the industry as more deals require FTC approval and some potentially significant asset sales. Overall, 2025 is expected to be a good environment for M&A and capital raising activities and opportunities for industry participants.

Disclaimer

The contents of this publication are presented for informational purposes only by Matrix Capital Markets Group, Inc. and MCMG Capital Advisors, Inc. (“Matrix”), and nothing contained herein is an offer to sell or a solicitation to purchase any of the securities discussed. While Matrix believes the information presented in this publication is accurate, this publication is provided “AS IS” and without warranty of any kind, either expressed or implied, including, but not limited to, the implied warranty of merchantability, fitness for a particular purpose, or non‐infringement. Matrix assumes no responsibility for errors or omissions in this presentation or other documents which may be contained in, referenced, or linked to this publication. Any recipient of this publication is expressly responsible to seek out its own professional advice with respect to the information contained herein.