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TravelCenters of America And BP: High-Probability Merger Arbitrage

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Commercial trucks astatine a motortruck extremity successful Nevada

Yuriy Vinnicov

TravelCenters of America (NASDAQ:TA) is simply a $1.3bn marketplace headdress usability of recreation centers, motortruck work accommodation and restaurants successful nan US. Yesterday, nan institution revealed that it is getting acquired by lipid & state elephantine BP (NYSE:BP) astatine $86/share. TA’s stock value has jumped 71% upon nan announcement and nan dispersed to BP’s connection presently stands astatine 2%. The acquisition will require regulatory and TA’s shareholder approvals. The companies expect a merger closing successful mid-2023, implying a alternatively short closing timeline. Assuming transaction closing successful 3 months, nan business offers an 8% annualized return.

The transaction comes arsenic portion of BP’s strategical push towards little c mobility alternatives. The lipid and state behemoth has noted 5 strategical attraction areas - EV charging, bioenergy, renewables, hydrogen and c capture/storage. BP aims to spend astir half of its finance annually into these maturation areas by 2030. As an denotation of management’s ambitions successful these fields, BP precocious announced plans to put $1bn successful EV charging crossed nan US by 2030 amid nan Biden administration’s broader efforts to grow nan home conveyance charging network. Moreover, past twelvemonth BP acquired US biogas shaper Archaea for $4.1bn. In this context, nan acquisition of TravelCenters of America seems to beryllium a strategical move. The transaction will let BP to grow its unit web of road sites which, successful turn, will thief nan acquirer successful increasing its EV charging, biofuel, renewable earthy state and hydrogen mobility offerings. It's worthy noting that TA precocious reached an agreement pinch nan largest unfastened fast-charging web successful nan US, Electrify America. As portion of nan agreement, nan companies will instal northbound of 1000 chargers complete nan adjacent 5 years, pinch nan first stations group to beryllium deployed this year. Aside from assisting BP’s strategical semipermanent maturation plans, nan merger will grow nan acquirer’s beingness successful nan US roadworthy power marketplace wherever TA is nan 3rd largest motortruck extremity and recreation halfway operator. The merger will besides let BP to diversify its revenues by adding TA’s higher separator convenience shop business. For these reasons, nan consequence of nan purchaser stepping distant present seems minimal.

The merger conditions look highly apt to beryllium satisfied. I expect TA’s shareholders to support nan acquisition connection coming astatine a monolithic 74% premium to unaffected stock price. BP’s bid values TA astatine 4.2x TTM adjusted EBITDA (excluding operating leases). While this does not look to beryllium a hefty multiple, it compares to 2.0x-2.3x multiples nan institution fetched successful 2017-2018 and 3.4x-3.5x during 2019-2021. It's worthy noting that 2 of TA’s shareholders - SVC (owns 7.8%, leases astir of TA’s recreation centers to nan company) and RMR (4.1%, manages TA’s business for a guidance fee) are already successful support of nan transaction. TA’s guidance owns different 8% liking successful nan company. Moreover, nan target’s shareholder guidelines includes a mates of passive organization holders, including BlackRock (6%) and Goldman Sachs (3%), which look improbable to reason a strategical woody announced astatine a very sizable premium.

Any antitrust pushback is likewise unlikely. TA’s marketplace stock successful nan US road recreation halfway marketplace has stood astatine 4% (see below). This compares to 12% and 8% marketplace shares captured by nan largest competitors Pilot, Flying J, and Love’s. Aside from these 3 nationwide recreation halfway operators, nan manufacture is highly fragmented pinch a precocious number of smaller location players. Similarly, TA’s marketplace stock successful nan US diesel marketplace has been alternatively insignificant astatine 6.8% arsenic of Q1’22. It's worthy highlighting that nan horizontal overlap betwixt BP and TA is alternatively constricted arsenic TA’s recreation centers are located crossed US highways whereas BP’s convenience stores are predominantly successful off-highway locations.

US Highway Travel Center Market Shares

US Highway Travel Center Market Shares. Calculated by Number of Travel Centers Adjacent to Highways. (TravelCenters of America Investor Presentation, November 2022)

On apical of that, a somewhat comparable manufacture acquisition from 2020 suggests regulatory guidance is unlikely. In 2020, 7-Eleven acquired state station/convenience shop concatenation Speedway successful a $21bn transaction. The acquisition allowed 7-Eleven to scoop up astir 3800 of Speedway’s unit substance outlets. The transaction, which faced FTC pushback, yet closed successfully aft divestitures of 293 locations. The woody mixed nan 3rd largest state position concatenation successful nan US (by number of convenience stores) pinch nan seventh classed manufacture subordinate arsenic of 2020 (see below). For reference, BP was classed arsenic nan sixth-largest state position concatenation successful nan US whereby TA operates 280 recreation centers - materially beneath nan number of convenience stores operated by Speedway. Given that nan existent transaction is overmuch tinier successful size and standard than 7-Eleven’s acquisition of Speedway, I do not expect immoderate divestitures to beryllium required.

Number of Convenience Stores Operated By Gas Station Chains successful nan US

Number of Convenience Stores Operated By Gas Station Chains successful nan US, 2020. (ScrapeHero)

Importantly, nan downside (41% to pre-announcement levels) mightiness beryllium somewhat protected successful this merger-arb situation. TA’s merger-related filing mentions that nan merger statement follows “competitive rounds of bidding from imaginable buyers”. This suggests that successful nan improbable lawsuit of nan existent woody breaking, location is simply a bully chance different imaginable acquirer steps in.

TravelCenters of America

TA’s products and services see diesel and gasoline fuel, motortruck attraction and repair, recreation stores and parking. Non-fuel products and services relationship for astir 70% of nan company’s gross profits. Most of nan company’s locations are leased.

TravelCenters of America has undergone a successful business translator since 2019. The translator included hiring a caller CEO, overhaul of nan company’s exertion and systems (e.g. self-checkout and mobile loyalty constituent redemption), maturation done M&A, tract refreshes and improvements arsenic good arsenic improvement of replacement power offerings. The company’s operational capacity has improved materially - TA recorded $320m successful TTM EBITDA compared to $131m-$146m successful 2019-2020. Moreover, indebtedness and equity raises allowed nan institution to amended its liquidity position (defined arsenic rate and rate equivalents positive nett readiness connected revolver) from $102m successful 2019 to $647m arsenic of Q3’22. TA’s shares person subsequently importantly re-rated - stock value roseate from $8.89/share arsenic of mid-Dec’19 to $49.44/share earlier nan caller acquisition agreement.

TA’s guidance has been bullish connected nan business’ prospects going guardant fixed favorable manufacture fundamentals, including nan truth that trucking remaining nan superior intends of freight proscription successful nan US (73% of measurement successful 2020). The US motortruck freight manufacture is anticipated to proceed benefiting from secular tailwinds, increasing astatine a accelerated >10% maturation complaint done 2030. Meanwhile, from a competitory standpoint TA is well-positioned fixed its existing recreation halfway footprint and precocious barriers to introduction owed to economies of scale.

TravelCenters of America Adjusted EBITDA

TravelCenters of America Investor Presentation, November 2022

Conclusion

The merger betwixt TravelCenters of America and BP seems highly apt to close. I expect TA’s shareholders to o.k. nan transaction, meanwhile, immoderate regulatory pushback seems improbable fixed TA’s comparatively debased marketplace stock successful nan recreation halfway space. However, while nan business does connection a rather decent 8% annualized return, I americium inclined to hold for a imaginable value retracement for a amended introduction constituent here.

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