Haymaker Acquisition Corp. II is in a Deal to Create Newly-Formed Company ARKO Corp.
- Andrew and Steven Heyer’s 2nd Haymaker SPAC to Bring Convenience-Store Owner Public
- New Company to Be Renamed ARKO Corp. (Expected NASDAQ ticker: ARKO)
- ARKO is 7th Largest U.S. Convenience Store Chain, Growing Organically and via M&A
- Convenience Stores are Fragmented, Largely Shielded from “Amazon Effect”
- Newly-Acquired ARKO Stores See Surge in Profits Thanks to Parent’s Purchasing Power
- ARKO CEO Arie Kotler Has Grown Company from 320 to 1400 Sites via 17 M&A Deals
- Deal Terms Indicate Significant Valuation Discount to Major Listed Comps
- ARKO Itself Could be a Viable Takeover Target and See Large Deal Premium
By John Jannarone and Jarrett Banks
When the coronavirus pandemic struck, one of the few excursions Americans continued to make was a trip to the nearest corner store for snacks, candy, or beer. For investors, a rare deal on shares in a fast-growing convenience-store operator should also yield sweet returns.
Meet ARKO Corp., which will be created through a merger with Haymaker Acquisition Corp. II (NASDAQ: HYAC, HYACW, HYACU), a special purpose acquisition company or SPAC that raised $400 million last year to purchase a target and take it public. The newly-formed company, which is the 7th-largest owner of convenience stores in the U.S., will begin trading once the deal is formally approved in the fourth quarter. Investors who buy Haymaker now will see their shares automatically convert to ARKO stock once the transaction closes.
The first thing investors should understand about convenience stores is that they are extremely fragmented, with the vast majority owned by mom-and-pop operators. Some 63% of convenience stores are part of chains of 10 units or less, according to the National Association of Convenience Stores.
Many such small operators don’t have the same profit profile as their bigger counterparts because they don’t benefit from scale and purchasing power. Indeed, many of them can’t purchase major brands like Coca Cola on a wholesale basis and instead stock up on such items at their local Costco or BJ’s Wholesale Club. In turn, many operators have thin profit margins – which are even more uncomfortable when they carry heavy debt loads.
That creates an opportunity for a company like ARKO, which has an extensive track record of successful M&A, led by CEO Arie Kotler. Since 2011, Mr. Kotler and his in-house M&A team have overseen 17 M&A deals, helping the footprint more-than quadruple from 320 to 1400 sites.
Arie Kotler Will Remain at the Helm as CEO of ARKO Corp.
Once stores are under ARKO’s umbrella, their profits tend to increase dramatically. Take the acquisition of 296 VPS stores in the southeast. Ebitda rose 31% in the 12 months after the deal, from $16.1 million to $21.1 million. The improvement can be even more significant in some cases: Ebitda increased 90%, from $0.8 million to $1.5 million in the 12 months following the acquisition of five Hurst Harvey stores.
Of course, investors might ask why there aren’t more bidders for convenience-store chains if the potential returns are so high. But major players like Tokyo-listed Seven & i Holdings Co., Ltd., owner of 7-Eleven, Inc., are simply too large to care about ARKO’s targets. The Japanese giant recently bought 3,900 Speedway stores from Marathon and a few years before purchased 1,030 stores from Sunoco.
What’s more, ARKO has a reliable source of organic growth: store remodels. Shoppers gravitate to clean, pleasant-looking gas stations and can be downright scared to enter shops that are dirty and run down. The company estimates that about half of its current store base can be remodeled, offering a low-risk opportunity to boost profits.
The proof is in the numbers. The company has seen a return on capital of 30% to 60% from store rebuilds and remodels in recent years. It conservatively assumes a 20% return on capital invested over the next three to five years on remodels, which translates to a whopping $72 million of incremental Ebitda (on top of $210 million to $215 million of Ebitda expected in 2021).
E-commerce, which has been a headache for many big-box retailers, is unlikely to interrupt ARKO’s sales growth. For one, it operates chiefly in remote locations where robust B2C networks simply don’t exist. Second, ARKO can (and is) partnering with third-party delivery companies like Doordash to meet customer demand where it exists. Last, and perhaps most important, people shopping for cigarettes, candy, and beer often want to walk or drive around the corner rather than wait for delivery.
The coronavirus pandemic also provided a stress test for ARKO’s business model – which it passed with flying colors. The company saw same-store in-store sales dip negative for only two months when people were strictly quarantined in March and April. Sales have swung back strongly since then – even as people avoid many shopping experiences.
One other bonus investors shouldn’t overlook is the pending acquisition of Empire Petroleum, which sells fuel on a wholesale basis. The deal, expected to close in October, will boost Ebitda significantly and has strategic benefits to boot.
First, the power to purchase fuel further up the wholesale chain will reduce ARKO’s cost per gallon, boosting retail fuel margins. Second, ARKO will pick up 77 retail locations, broadening its footprint of stores across the country.
In a strong vote of confidence in ARKO, the company’s institutional shareholders are collectively rolling 100% of their equity into the newly-formed entity and not cashing out a dime. They include Davidson Kempner Asset Management LP, Harvest Partners, and Ares Management Corp.
The newly formed company will also emerge with a clean balance sheet – which should ease any concerns about any hiccups in the current economic recovery. ARKO will have net debt of $371 million, or 1.7x 2020 expected Ebitda.
ARKO’s valuation is also compelling. At roughly $10 per share, investors can own the stock at an enterprise value of 9 times 2021 expected Ebitda. Alimentation Couche-Tard Inc. trades at 10.4 times and Casey’s General Stores, Inc. trades at 10.9 times, according to Sentieo, an AI-enabled research platform. ARKO’s Ebitda has grown at a blistering 29% annualized rate since 2016 – far faster than Couche-Tard or Casey’s.
It also would not be a surprise to see ARKO acquired by a larger rival. If so, investors should expect a healthy takeover premium. 7-Eleven, for instance, paid 13.7 times Ebitda for the Speedway assets earlier this year.
There is no shortage of sexy, profitless companies going public at the moment at sky-high sales multiples. But for investors seeking true profitability and a sensible valuation, ARKO is tough to beat.
John Jannarone, Editor-in-Chief