In the forecourt property world, some dealers are being made offers on their sites that they can’t refuse. Not, of course, in the sense of the infamous Don Corleone quote from The Godfather, but more along the lines of a once-in-a-lifetime offer that they can’t resist.
Matthew Williamson, director automotive and roadside at GVA, certainly thinks so: "Some transactions, such as Chartman, Manor Service Stations and Kerridge Group, are ones where you maybe thought they wouldn’t have sold, but the offer must have seemed too good to be true."
And there’s certainly a pattern across the industry of the Top 50 Indie ’super groups’ snapping up smaller, but still significant, players.
According to Barber Wadlow there were around 160 petrol filling stations (PFS) transacted in 2017. Director Adam Wadlow says: "The major independent retailers, including MRH, MFG, Euro Garages and Applegreen, have been responsible for circa 50% of transactions, picking off a variety of small/medium-sized independent retailers. It should, however, be noted that the 158 PFS transactions in 2017, represents a 21% decline on the previous 12 months. The sizeable reduction is, however, due to a lack of stock as opposed to a lack of demand."
Meanwhile, Christie & Co says 2017 was one of the most active periods it has ever seen, resulting in the company selling more PFS in 2017 than ever before.
Of particular note during 2017 (with sales advised through various outlets) were:
MFG buying Manor Service Stations (nine sites); Burns Group (four sites); and Kerridge Group (four sites)
MRH buying Peregrine Retail (five sites) and Chartman Retail (11 sites)
Euro Garages buying High Noon (eight sites) and Three Elms (five sites)
State Oil buying Retail Fuels (nine sites).
Of these transactions, Barber Wadlow advised Manor Service Stations on the sale of its nine-site business to MFG and also advised Retail Fuels on the sale of its nine-site business to State Oil.
In addition, the company advised Carsley Group on the sale of its seven-site business to Applegreen. Plus it has also dealt with various single-site transactions, including the letting of Fosseway Service Station on the A46 to Applegreen which is intending to comprehensively redevelop the site.
Williamson at GVA says many of the recent deals have been off-market where you only get to hear about them once the deal is done.
"It’s still a very buoyant market for sellers, but buyers are struggling to find opportunities," he explains. "Larger groups are more interested in portfolio acquisitions and new-to-industry sites on trunk roads. But then there are still some smaller and first-time buyers who are buying single sites. And there is some churn with the large dealer groups who may buy a smaller group, keep the best sites and sell off the others."
He says this is all driven by banks keen to invest in the sector. "The major banks are very active the likes of Lloyds and HSBC, plus there is also peer-to-peer lending."
Phil Blackford, partner and head of automotive and roadside at Rapleys, says that while many of the big operators are backed by private equity or public listing, smaller firms usually look to traditional bank funding which remains generally available once a sound business case is provided. "Other firms are exploring scaling up and capitalising their businesses through other strategies; Lone Star, for example, is considering an IPO of MRH this year potentially valuing the business at £1.5bn. However, there are still many parties at the lower end of the market that have issues with raising funding, and these tend to look at leasehold sites only."
One dealer who has benefited from bank lending is former Top 50 Indie Hockenhull Garages (HGS), which has opened a new petrol station and c-store in South Wigston, Leicester. This is the first forecourt development for the company’s founder and chairman Peter Hockenhull since he came out of retirement to assist in running the business with his son Joe.
Peter sold the majority of his sites to Euro Garages around 10 years ago, but the company has continued to operate a key part of the business today includes eight Shell cluster sites.
Last year HGS had the chance to acquire the South Wigston site in Saffron Lane which had been derelict for many years, but had planning permission for a forecourt. The purchase was supported by a HSBC loan which funded part of the acquisition and development costs.
Meanwhile, Christie Finance reports brisk activity arranging commercial loans through no less than 25 different lenders in 2017.
Steve Rodell, managing director retail at the firm, says these include not only traditional high street banks, but also newer ’challenger’ banks, crowdfunding and, more recently, unsecured lenders. He adds: "Furthermore, the private equity-backed operators have deep cash resources. The need to grow their business for investors has fuelled group deal activity, resulting in a number of groups being snapped up, often off-market at premium pricing. There will undoubtedly be further consolidation this year."
Blackford at Rapleys agrees with Williamson that there is a real appetite for new-to-industry greenfield developments, both where there are gaps in the network and where there arenew housing developments and infrastructure.
"With all this activity, new formats, concepts and partnerships are evolving. Unmanned filling stations are being rolled out, often on smaller, closed-down sites including the community project in Newcastleton. This interest, and innovation in the market, has seen a lot of capital expenditure into older networks that have seen little investment in recent years."
Back to pricing, and Rodell says the surge in the value of PFS is due to a number of factors: "Petrol stations are valued according to their trading potential, measured by profitability. For the past few years many businesses have seen results grow. So, it follows that values rise. Interest rates remain historically low, enabling more buyers to raise finance, further fuelling demand, which almost always exceeds the supply of available sites at every level of the market."
The question has to be asked whether some sellers are being too optimistic about what they might get.
Wadlow says: "During 2017, we have seen examples of sellers with unrealistic price expectations. This is generally because one or two sellers are taking the financial analysis from one transaction and applying it to their own property without having any regard to variances in quality of the property, need for capital expenditure, opportunities to re-gear supply agreements, or other untapped trading potential etc. These factors will have a fundamental influence on a PFS’s value. Every PFS is different, therefore taking the EBITDA (earnings before interest, taxes, depreciation and amortisation) multiple achieved on one site and applying it to another may give you completely the wrong answer. In short, two petrol stations that generate the same levels of profitability can have very different values.
"We have seen and achieved EBITDA multiples in the region of 10 and 12 (and in certain cases, even higher). However, purchasers are not buying these businesses to sit on low levels of return. If a business sale is to achieve a double-digit multiple, it must offer a sufficient and genuinely achievable untapped trading potential."
Stuart Lobb, associate at Rapleys, adds: "Although numbers are hidden, anecdotal evidence suggests that the multipliers paid on EBITDA are very high. Retailers are savvy to assets that have potentially high values for alternative uses, and we have seen increasing instructions from established forecourt and other auto and roadside clients for planning and development services. What is key, is identifying those prospective value drivers and developing strategies for enhancing values."
For what it’s worth
Wadlow says there are always sites that will be worth more to some companies than to others: "That may be because a site is geographically well-located within a retailer’s existing retail network.
"In such a scenario, the price paid may look expensive to the market as a whole, but to a particular retailer it offers real value."
"I wouldn’t say that sellers are being too greedy," says David Collins, partner at Adlers. "In some cases, prices are rather optimistic. Market forces ultimately dictate the level of value. Obviously, there is a ceiling beyond which deals are not viable. We may be close to that point now. Given the way in which PFS values have risen in recent years, it is surprising that some smaller operators have not decided to take the money and run. This probably reflects the degree of optimism in the forecourt sector."
For Adlers, 2017 saw them mostly finding and negotiating the acquisition of new-to-industry sites for BP.
"We now have several opportunities in the planning stage," says Collins.
As for the supply side of the forecourt market, Collins can’t see it changing much in 2018.
"I think it will be a case of ’as you were’. The forecourt sector has proved to be remarkably resilient over a number of years and there is nothing to suggest that this will change unless the economy tanks after Brexit, but I think that’s unlikely.
"The trend for large sites to accommodate larger c-stores will continue."
Wadlow adds: "There will continue to be a limited supply of available petrol filling station businesses, and we do not envisage market demand drying up any time soon while trading conditions remain relatively robust.
"It is, however, probable that the volume of transactions will reduce by virtue of the fact that fewer sizeable independent businesses now exist following the mergers and acquisitions activity of 2016 and 2017."
Freehold or leasehold?
Most transactions in the forecourt sector are freehold but for some people, leasehold is the only way they can get into the market or expand on what they’ve already got.
"Freeholds are far more attractive, particularly for small- and medium-sized operators," says David Collins, partner at Adlers. "Freeholds are normally appreciating assets and may have significant alternative use value should the filling station use no longer be viable."
Steve Rodell, managing director retail at Christie & Co, says: "The most sought after opportunities are usually freeholds where there is potential to add value. This is when multiples of earnings can rise above the average (you are often multiplying an artificial bottom line that could be higher with investment)."
And Matthew Williamson, director automotive and roadside at GVA, says leaseholds can be good for first-time buyers who can’t afford a freehold, plus there might be an opportunity to buy the freehold at a later date.
Forecourt Property Market Index - 2018
Strong trading conditions and private equity investment continue to support property values, with the Barber Wadlow Forecourt Property Value Index (in association with Experian Catalist) registering a 6% increase in 2017.
The Index has now more than doubled over the past 15 years and achieved a 73% increase since the bottom of the market in 2011.
A 6% increase in 2017 represents a slowdown in growth by comparison to the previous two years (+14% in 2015, +9% in 2016). This is unsurprising given the substantial value increases during 2015/16 as the market adjusted to the reduced supply of available sites.
Despite the slowdown, market demand remains strong, underpinned by limited supply, with the only sizeable acquisition opportunities being indie dealer groups.
The major indies continue to be the most active buyers, but we have also seen new parties come forward. For example, Harvest Energy acquired Retail Fuels (nine sites) in December and Certas Energy acquired two sites earlier in the year.
Small/medium-sized indies are also continuing to buy single sites, which tend to be of lesser interest to major indies.
Going forward, we expect demand and therefore values to be sustained, frustrated by the ongoing lack of acquisition opportunities and favourable trading conditions. We do not anticipate that the recent announcement by the government of its plans to ban the sale of hydrocarbon-powered cars by 2040 will have a discernible impact upon values.*Value of the average ’bottom quarter’ of oil company sites (in terms of trading performance), which is now the most representative trading profile of the sites that are coming to the market.
Going down the electric avenue
With government support for electric vehicles (EVs) so strong, anyone investing in a new site or thinking about redevelopment needs to consider the impact this will have on their business.
David Collins, partner at Adlers, says: "There are so many issues around this subject and a variety of opinions across the industry. For many it is a case of wait and see. Others are acting now."
Those that are ’acting now’ include Peter Hockenhull and his son Joe, who recently opened a new forecourt in Leicester. Thinking ahead, they ran cables under the site so electric charging points can be installed in the future.
"EVs are something the market will have to look at," says Matthew Williamson, director automotive and roadside at GVA. "That’s because the general layout of forecourts is the same as it was in the 1960s and if you’re investing and developing you’ve got to consider that layouts could change."
Stuart Lobb, associate at Rapleys, agrees: "The development of EV charging points will continue to be high on the radar, and will likely increase as the big operators roll out their new offerings."
Thinking of selling up?
It is critical for any seller to have their ’house in order’ before they think about taking their siteto market.
A checklist of key items you’ll need includes:
Ownership and transaction structure ensure that you can offer the property and business in an uncomplicated structure.
Accurate trading information comprehensive management accounts providing a breakdown of both gross profit and overheads are essential.
Compile copies of all supply and maintenance agreements, as well as licences (such as your petroleum licence and premises licence).
Staff information compile copies of all staff contracts and ensure that you are fully complying with all current employment legislation.
Source: Barber Wadlow