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TravelCenters of America: BP Merger Arb Is Too Small, Bonds Are A Better Deal

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Big rigs semi trucks opinionated connected nan motortruck extremity parking batch nether a lighted awning astatine night

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Together Again

Oil awesome (BP) precocious announced that it will get TravelCenters of America (NASDAQ:TA) for $86 per share. The woody is expected to adjacent "by mid-year 2023" according to TA's version of the announcement. This was a awesome windfall for TA shareholders, who saw their banal rocket up 70.8% successful a azygous day. The banal has traded higher than nan woody value only for a little clip successful 2015 arsenic good arsenic for a fewer months aft nan IPO successful 2007 (accounting for nan effects of a 1:5 reverse divided successful 2019). Those who bought during nan 2008 financial situation aliases nan March 2020 covid clang scored a 10-bagger, however.

TA Price Chart

Seeking Alpha

This woody would beryllium BP and TA's 2nd marriage. The first came erstwhile Standard Oil of Ohio bought Truckstops of America successful 1984 erstwhile BP was still a partial proprietor of Sohio. BP acquired each of Sohio successful 1987, and past went connected to sell TA successful 1992 successful 1 of its periodic moves distant from retail. Over nan consequent 28 years aliases so, BP engaged successful a dizzying array of moves successful nan unit abstraction successful nan US, getting free of locally celebrated brands for illustration Sohio and Amoco while keeping others for illustration Arco. They besides rolled retired and rolled backmost respective convenience shop concepts for illustration BP Connect, Split Second, and AM/PM. By 2019, astir BP stations successful nan US were owned by 3rd parties, unit having been considered non-strategic for astir of this period.

BP's cognition towards unit changed successful a large measurement pinch nan accession of Bernard Looney arsenic CEO successful 2020. Growing unit and convenience operations is now a cardinal plank successful BP's strategy. Assuming nan electrification inclination successful proscription is real, nan strategy makes sense. Retail sites are a premier spot for locating EV chargers. Even nan fastest chargers return longer to complaint a artillery than a state pump takes to capable a substance tank. In that case, it of people makes consciousness to person a bully convenience shop wherever motorists tin do immoderate shopping aliases eating while their conveyance charges.

BP Retail Strategy

BP 2020 Strategy Presentation

Since past BP has been moving slow backmost into unit ownership successful nan US, for illustration pinch nan acquisition of Thornton's successful 2021. The TA acquisition offers BP instant standard successful unit and besides provides a level for BP's different strategical planks specified arsenic EV charging, biofuels, and hydrogen.

Is It Worth It?

TravelCenters of America has been improving their operations successful caller years, arsenic I wrote successful September 2022. They person of people benefitted from precocious substance margins but person besides improved their non-fuel business, peculiarly motortruck service. Still, nan biggest financial driver is substance margins. In September, I estimated a 2023 EPS worth for nan institution astatine $4.75 based connected a $0.20/gallon substance margin. In nan most caller quarter, TA had a substance separator of $0.227/gallon, and analyst consensus is adjacent to my net estimate astatine $4.87.

A recent article by Daniel Jones recommended buying TA moreover aft nan woody announcement, pinch nan thesis that TA still looks undervalued if nan woody were to autumn through. While I deliberation location is simply a very debased probability of nan woody not closing, nan existing business looks reasonably weighted to me.

BP's $86/share bid values TA astatine a P/E of 17.65. It's difficult to find comps pinch nan different US motortruck extremity chains privately held, but if I look astatine Canadian convenience/fuel concatenation Alimentation Couche-Tard (ATD:CA) we spot that it is weighted astatine 16.71 times FY 2023 earnings and 17.16 times 2024. (Their fiscal twelvemonth ends successful April.)

These numbers propose BP is paying astir adjacent value, aliases possibly a small above, for TA's existing business. TA's merger announcement states that nan $86 value was nan result of a bidding warfare betwixt respective imaginable buyers. If nan winner's curse applies, that is different denotation that nan bid is astatine aliases supra adjacent value.

Following nan implementation of TA's turnaround scheme and respective quarters of improved operating performance, TA received unsolicited liking to get nan Company. In response, TA's Board hired financial and ineligible advisors arsenic portion of a general process to see a imaginable waste of nan Company. This process yet included competitory rounds of bidding from imaginable buyers that resulted successful nan transaction announced today.

Clearly, nan precocious value paid by BP includes immoderate premium for nan synergies BP expects to execute pinch its different strategies, arsenic stated successful their merger presentation.

BP Travelcenters value

BP

With nan banal afloat weighted and only a 2% arbitrage opportunity betwixt nan existent stock value and nan woody value, I would waste TA here. The competitory bidding that already occurred makes it improbable for higher bids to travel in. If we presume closure astatine 6/30, nan 2% translates to an annualized return of 5.6%. 6-month and 1-year T-bills now output astir 5%. Even though nan consequence of woody nonaccomplishment is very low, nan 60 ground constituent premium complete treasuries is not capable to compensate for nan unexpected happening. Even a hold successful closing of a period aliases 2 would make T-bills nan amended choice.

Look At Baby Bonds Instead

The mostly of TA's semipermanent indebtedness consists of 3 bid of elder notes: nan 8.25% owed 1/15/2028 (NASDAQ:TANNI), nan 8% owed 12/15/2029 (NASDAQ:TANNL), and nan 8% owed 2030 (NASDAQ:TANNZ).

These notes are considered "baby bonds" pinch a par worth of $25. Unlike regular bonds, they waste and acquisition connected nan banal speech nan aforesaid measurement arsenic a communal banal and salary liking quarterly. You besides do not person to woody pinch accrued liking erstwhile you bargain and waste them. Each bid is now callable astatine immoderate clip astatine par worth of $25. TA has $467 cardinal of rate connected its equilibrium expanse and nan full par worth of these bonds is $330 million, yet nan institution has not called them contempt nan precocious coupon.

It's not clear to maine if Section 6.8 of nan merger agreement wherever nan institution agrees to salary disconnected "certain indebtedness" refers to these notes. Even if it does not, I deliberation it is apt that these notes will beryllium called astir nan clip of nan merger. BP has a little costs of superior and has nary logic to spell connected paying 8% erstwhile it has already committed to usage 40% of its free rate travel to trim its ain debt.

On nan different hand, these notes would magnitude to only astir 1% of BP's full debt, which whitethorn beryllium truthful insignificant that they conscionable fto nan notes tally until maturity successful 2028-2030. To find precedent for this behavior, we only person to look astatine nan merger pinch BP Midstream Partners. BP fto this MLP tally pinch its double-digit yield, until 2022 erstwhile it could person bought it backmost a twelvemonth earlier astatine prices astir 50% lower.

The guidelines lawsuit information of these notes should presume they are called connected 6/30/2023 astatine nan clip of nan merger close. In that case, astatine slightest TANNI and TANNZ look for illustration they would nutrient a amended return than TA stock. If nan notes are not called, they are easy nan amended woody arsenic they proceed to salary nan 8% aliases 8.25% coupon quarterly until maturity successful 2028-2030. If not called, nan notes would besides use from BP's finance people in installments rating. (The TA bonds are not presently rated but nan output suggests thing astir BB-)

See nan array beneath for my return calculations. TANNI and TANNZ person 2 much liking payments earlier 6/30, going ex "dividend" connected 3/30 and 6/29. TANNL goes ex "dividend" successful nan mediate of nan 4th connected 5/12, meaning it has 1.5 much liking payments earlier 6/30. (Accrued liking is paid if nan bonds are called.) As we spot below, moreover paying supra par now results successful yields-to-worst for TANNI and TANNZ that transcend nan expected return for TA. TANNL has a YTW that is conscionable in-line pinch nan TA return.

TA and TA bonds return calculation

Author Spreadsheet

Risks & Considerations

The biggest consequence for nan babe bonds is that they get called early, moreover earlier nan woody close, arsenic TA has nan rate connected its equilibrium expanse to do so. Paying supra par would consequence successful a superior nonaccomplishment pinch little liking payments to offset it. A little apt consequence is that nan woody does not adjacent and TA suffers bad business conditions earlier nan 2028-30 maturity dates, creating a consequence of default.

Investors should support successful mind that these bonds waste and acquisition a debased volumes and bids for moreover 1000 "shares" could move nan value truthful overmuch that nan comparative attractiveness goes away. Please usage limit orders and see bidding for nary much than a fewer 100 shares astatine a time.

Conclusion

BP's takeover of TravelCenters of America looks apt based connected nan constrictive arb of 2% betwixt nan existent value and nan woody value. This dispersed is excessively debased for a waste and acquisition moreover pinch nan debased consequence of failure. Even a short hold past a 6/30 adjacent day would springiness moreover T-Bills a higher return.

Two of nan 3 babe bonds, TANNI and TANNZ, connection a higher return if we presume they are called connected 6/30. In nan flimsy chance they are not called, they proceed paying an 8% aliases 8.25% coupon until maturity successful 2028-30. These bonds are a amended measurement to play nan takeover.

This article was written by

Gary Gambino floor plan picture

I americium a Chemical Engineer by training and person an MBA pinch concentrations successful Finance and Operations Management. I retired early aft 22 years successful nan power manufacture pinch roles successful engineering, planning, and financial analysis. I person managed my ain portfolio since 1998 and person met my extremity to lucifer nan S+P 500 return complete nan agelong word pinch little volatility and higher income yield. I scheme to attraction my penning connected positions I already clasp aliases americium considering changing, nevertheless my bias is toward semipermanent holding unless location is simply a very compelling logic to sell.

Disclosure: I/we person a beneficial agelong position successful nan shares of BP, TANNL either done banal ownership, options, aliases different derivatives. I wrote this article myself, and it expresses my ain opinions. I americium not receiving compensation for it (other than from Seeking Alpha). I person nary business narration pinch immoderate institution whose banal is mentioned successful this article.

Editor: Naga



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