Business

The Gasoline Station M&A Frenzy Seems Like a Bubble

(Bloomberg Opinion) — Investors in the retail sector can’t get their fill of gas stations. 

Seven & i Holdings Co., the Japanese company that controls 7-Eleven, is in exclusive talks to acquire Marathon Petroleum Corp.’s Speedway gas stations for about $22 billion, people familiar with the matter told Scott Deveau, Kiel Porter and Manuel Baigorri of Bloomberg News.

That’s not the only deal out there. EG Group, a closely held U.K. forecourts operator that had also shown an interest in Speedway, this week offered A$3.9 billion ($2.6 billion) in cash for the gas stations owned by Caltex Australia Ltd.

Alimentation Couche-Tard Inc. is also bidding for Caltex’s entire business, including its refinery and fuel distribution unit as well as the retail gas-station network. Couche-Tard, Seven & i, and Berkshire Hathaway Inc. went on a similar spree for U.S. fuel retailers, truck stops and convenience stores in 2017.

The argument for these deals is quite straightforward. Grocery retail for several decades has been shifting away from the stereotype of large nuclear families doing weekly shopping trips in big-box supermarkets, toward individuals, working parents and retirees picking up a few things from a local convenience store several times a week.

If you’re looking to expand into convenience stores, gas stations are a target-rich environment — scattered through urban areas and along major highways, and ripe for upgrading beyond their traditional fare of basic fuel for vehicles and their drivers. In the meantime, the constant need to fill up gas tanks provides a reliable stream of cash, although one that’s highly leveraged to the price of oil.

Seven & i hopes to echo the revival of its domestic business by offering a wider range of products and fresh food to customers. EG Group, which has grown from a single U.K. gas station in 2001 to encompass around 5,900 sites on three continents, makes a similar argument. It hopes to eventually make about 70% of its profits from non-fuel retail, up from around 50% currently, by bringing recognized retail brands into its forecourts to create mini-malls.

There’s just one problem with this bold vision. Fuel retail is on the verge of a major structural revolution — and the result isn’t likely to be a pretty one for gas stations.

The most obvious bear scenario would come if automakers’ rush to electrify their product ranges succeeds in bringing about the decline of the internal combustion engine. Around 10 million electric vehicles will be on the road by the end of this year and there’s already nearly a million EV charging stations, according to BloombergNEF.

While that still represents a small share of the car market, the situation should change rapidly in the second half of this decade, as the costs of electric vehicles fall definitively below those of conventional ones and government phase-out targets in the 2030s start to loom. On a global basis, the International Energy Agency expects gasoline demand to peak in the late 2020s. The sorts of developed markets where the current gas station M&A frenzy is playing out are unlikely to be the most resilient to that shift.

Even if gas stations invest in their own charging infrastructure — a relatively costly activity, and one that would commit them to purchasing from third-party utilities rather than the vertically integrated refining businesses they’re often bundled up with — they risk losing their traditional monopoly on fuel supply to chargers in homes and workplaces. That threatens footfall, a key metric for retailers who depend on high volumes of customer traffic to make the most of their store assets.

Things may be somewhat better if the electric-car revolution fails to catch light. Even then, though, fuel-efficiency mandates mean fewer trips to buy gas, leading to a similar effect on footfall. Combined with a shift toward more online delivery, the effect could be dismal: By 2035, more than a quarter of gas stations will be unable to make economic profits in even the least electrified scenario, according to a report last year by Boston Consulting Group. 

All of this would be fine if convenience stores were going to be so profitable over the next few years that they could afford to make a quick buck and transform themselves before they’re overwhelmed by change.

There’s little sign of that, though. EG Group made just 16 million euros ($17.3 million) of net income on an underlying basis in its latest results, despite more than 12 billion euros of revenue (on a statutory basis, there was a 138 million euro net loss). Net income margins at Seven & i’s U.S. unit tend to hover around 3%, and returns on equity are an unspectacular 8% or 9%. Viva Energy Group Ltd., a competitor to Caltex which operates Shell-branded forecourts in Australia, has lost about 25% of its market capitalization since an initial public offering in 2018.

The days of the conventional gas station are numbered. Anyone who wants to make money from transforming them had better have their foot firmly pressed on the accelerator.

To contact the author of this story: David Fickling at dfickling@bloomberg.net

To contact the editor responsible for this story: Rachel Rosenthal at rrosenthal21@bloomberg.net

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

David Fickling is a Bloomberg Opinion columnist covering commodities, as well as industrial and consumer companies. He has been a reporter for Bloomberg News, Dow Jones, the Wall Street Journal, the Financial Times and the Guardian.

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