What at i is Fueling this Prolonged, Heightened M M&A &A Cycle? Five Qu Questions We Get Asked F Frequently Presented by: Cedric Fortemps, CFA, Managing Director Aji Fadahunsi, Managing Director Spencer Cavalier, CFA, Managing Director Annual Conference November 7, 2018
The e Five Mo e Most Popul ular Q Ques uestions 1. 1. What a are the macro and nd C& C&G G ind ndustry c cond nditions driving t this pr prolonged, heightened M&A cy cycl cle? 2. 2. How w is t tax ax law w impac acting g M&A A today? 3. 3. How w do I compete e agai against lar arge ger, b better er cap apital alized compan anies for ac acquisitions? 4. 4. Shou ould I I be thinking of of growing or or selling, or or is r remaining the same me s size ok ok? 5. 5. Is Is t this t the peak of of t the M M&A c cycle? 2 2
Macro: o: C Con ondition ons f for an A Active M M&A &A Market & & Com ompelli lling V Valu luation ons Business Confidence • Economic certainty & sentiment • Deal spending firepower (i.e. cash reserves and credit facilities) • Multiple capital providers and low volatility Robust Financial • Strong stock market Markets • Attractive cost of capital: interest rates, cap rates, ROE • Liquidity: ability to monetize Favorable Tax & • Capital gains rates • Lower ordinary tax rates for C-corporations and most passthrough entities Regulatory Environment • Ability to shield investment costs to enhance returns • Requirement to grow shareholder value and/or maintain distributions Corporate Imperative • Need to scale operations to improve margins & free cash flow • Activist shareholders • Young industries consolidating for intellectual property & market share Industry Convergence • Mature industries consolidating for scale and market share • Industries being disrupted by new products, services, etc. 3 3
Ma Macr cro: U U.S. B Bus usiness S Sent entiment i is Ver ery Strong Business Tendency Surveys for Manufacturing: Confidence Indicator for US 102 101 100 Normalized (Normal = 100) 99 98 97 96 95 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Source: Organization for Economic Co-operation and Development (OECD) 4 4
Ma Macr cro: 1 10 0 Yea ear U.S. Trea easury v vs. I Int nter erbank L Lend ending ( (LIBOR) Ra Rates es Source: S&P Capital IQ 5 5
Ma Macr cro: S&P 500 P 500 Per erformance s e sinc nce J e Janua nuary 1 1, 2009 2009 4000 3500 3000 2500 2000 1500 1000 500 0 Source: Federal Reserve Bank of St. Louis 6 6
Ma Macr cro: U U.S. R Rea eal GDP P Growth Source: Federal Reserve Bank of St. Louis 7 7
Ma Macr cro: U U.S. M& M&A Dea eal Value ( ue ($B $B) & & Dea eal Count unt 200 2007–2Q 2 2018 8 8
C&G Ind ndustry: T Three M& ee M&A Waves es S Sinc nce 1 1995 & 995 & Enter Ent erprise V e Value/ ue/Corporate e EB EBITDA Mul Multiples es Source: S&P Capital IQ 9 9
C&G Ind ndustry: M& M&A W Waves es S Sinc nce 2000 & e 2000 & Cond nditions D Dur uring W Waves es M&A Wave M&A Wave M&A Wave 1995 - 2000 2005 – 2008 2012 - Present • Business confidence • Robust financial • Business confidence markets • Robust Financial • Robust financial Markets • Corporate imperative markets • Corporate imperative • Favorable tax & regulatory environment • Corporate imperative • Industry convergence 10 10
C&G Indust C& stry: Co Conditions P Prolonging g & Heigh ightening Cu g Current Cy Cycle Condit ditio ion 201 012-2013 2014-2015 2016-2017 17 201 018 Business Confidence • Low interest & cap rates • Low interest & cap rates • Low interest & cap rates • Low interest & cap rates • High capital availability • High capital availability • High capital availability • High capital availability Robust Financial • IPOs of 2 MLPs: Susser • IPOs of CST Brands & • Due to sale of PTRY and CST, • Federal Reserve increases Petroleum Partners (now Murphy USA. C&G industry public Fed Fund rate by ¼ point 3x, Markets Sunoco LP) & Lehigh Gas • Other MLPs still forming companies go from 8 to 6 but buyers and sellers Partners (now CrossAmerica • Federal Reserve ends QE • Federal Reserve shrinks continue to view interest Partners). balance sheet & raises Fed rates & cap rates at • Other MLPs forming Funds rate slowly historically low levels Tax & Regulatory • Marketer electrification • Marketer electrification • Donald Trump elected 45 th • TCJA goes into effect concerns concerns U.S. President; lowers regs • President Trump continues Environment • Tax Cuts & Jobs Act of 2017 to lower regulations (TCJA) Passed • Fed banking regulators lower • Marketer electrification liquidity ratio, freeing up concerns more assets to fund more loans and invest in higher yield assets • Marketer electrification concerns Corporate Imperative • Activist investment firm • Activist investment firms • Activist investment firm • Activist investment firm invests in Hess Corporation invest PTRY, CST & TA invests in MPC invests in Casey’s General • PTRY sold to Couche-Tard • CST sold to Couche-Tard Store Industry • 24 privately held marketers • ETP buys Susser Holdings • 30 privately held marketers • MPC acquires Andeavor sold • MPC buys Hess Retail sold • 7-Eleven acquires Sunoco’s Convergence Holdings retail assets • 25 privately held marketers • 22 privately held marketers sold sold year-to-date 11 11
M& M&A Transact ction A Act ctivity: Conven enien ence e Retail & Fuel uels Distribution Cr Criteria f for Transactions Inc ncluded i in n Da Data Trans nsaction on has c closed At least 1 10 convenience s stores i inc ncluded o or 25 fue uel sup upply accoun unts Co Convenience stores and nd/or fue uels distribution bus usiness a a sub ubstantial compo ponent o of transaction US as assets included ed as as par art of tran ansac action For stock t transactions, m majority owne nership in c n compa pany was acqui uired b by buy uyer/investor Sal ale/l e/leas asebac ack tran ansac actions not included ed Buy uyer c cons nsidered pr private equi uity b buy uyer o onl nly for its pl platform acqui uisition 12 12
M&A Transac actio ion Activit ity: y: Convenie ience R Retai ail & & Fuels Distribution (cont’d) 13 13
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The e Five Mo e Most Popul ular Q Ques uestions 1. 1. What a are the macro and nd C& C&G G ind ndustry c cond nditions driving t this pr prolonged, heightened M&A cy cycl cle? 2. 2. How w is t tax ax law w impac acting g M&A A today? 3. 3. How w do I compete e agai against lar arge ger, b better er cap apital alized compan anies for ac acquisitions? 4. 4. Shou ould I I be thinking of of growing or or selling, or or is r remaining the same me s size ok ok? 5. 5. Is Is t this t the peak of of t the M M&A c cycle? 15 15
The e Tax Cut uts J Jobs bs Act ct: H How I Is It Impact cting M& M&A? Signed i into l o law on on Decemb mber 2 22, , 2017 Most s sign gnifican ant as aspec ects t to t tax ax l law w chan anges es af affec ecting g M&A: A: – Reduction in corporate income tax rate: – Top marginal rate of 35% for C-Corps changed to flat 21% rate – Pass-through entities’ owners are eligible for up to 20% of Qualified Business Income (QBI) as tax deduction – Immediate expensing for qualifying capital investments (i.e. accelerated depreciation) – Ability to depreciate 50% of “original use” value changed to 100% of buyers’ “first use” value – Limitation on business interest expense deduction – 30% of Adjusted Taxable Income (ATI), which is similar to EBITDA, limit on deductibility of interest expenses The TCJ CJA chang nges a are allowing buy uyers t to pa pay more for a acqui uisitions and nd/or get higher r retur urns and nd also results i in n less t taxes pa payable b by sellers o on n transactions 16 16
Example le of of the I Impact o of TCJA on A on a Hypothetical C l C&G &G M M&A &A Transaction on In the e exam xample, e, the e 3 tax ax law w chan ange ges w would al allow w a a buyer er to ge get the e sam ame e returns p paying $ g $147 mi million on ( (14.7 .7x Cor orporate E EBIT ITDA) a as it wou ould have generated p payi ying $ $120 m million on (12.0 .0x Corpo Co porate EBITDA) und under the pr previous t tax laws For t those conc ncerned about ut the i impact that po potential f fut uture int nterest r rate i inc ncreases w woul uld h have o on n M&A A mu multiples es, t the e tax ax law w chan ange ges in the e exam xample ab above e could offset inter erest r rat ate i e increas ases o of ap approxima mately 2 250 bas asis points, as assuming al all other er f fac actors, including E g EBI BITDA, d do not c chan ange ge 17 17
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