Brookfield Business Partners LP is pumping its international experience and growth plans into a $540-million deal to buy Loblaw Cos. Ltd.'s Canadian gas station network amid rampant industry consolidation.
The alternative asset manager said Wednesday that it would buy the 213 service stations and convenience stores located near Loblaw grocery stores along with institutional partners, and had simultaneously struck an agreement with Exxon Mobil Corp.-backed Imperial Oil Ltd. to rebrand under the historic U.S. Mobil fuel banner.
The deal pairs Brookfield's ability to strike cross-border partnerships with its ambitions to boost cash flows and earnings in the businesses it controls. And the investor makes no secret of its plans to extend the network of Mobil gas stations across more Loblaw locations, since the company now has more than 1,050 grocery stores. Cyrus Madon, CEO of Brookfield Business Partners, said in a statement that it will "work with Loblaw to enhance and grow the current network of gas stations."
Brookfield is taking a major position in retail petrol sales and marketing at a moment when deals in the sector have been frequent and transformative. On Tuesday, Parkland Fuel Corp. bought Chevron Corp.'s Canadian oil refining and marketing business for nearly $1.5-billion – that was just a few months after siphoning off hundreds of gas stations in Quebec and Atlantic Canada in a deal with Quebec-based Alimentation Couche-Tard Inc. to buy the majority of Texas-based CST Brands Inc.'s Canadian business. And last year, Imperial Oil sold its Esso-brand retail gas stations to five fuel distributors for $2.8-billion.
"I think there's an awful lot of interest in the Canadian downstream sector – it's in a state of transition the likes of which I haven't seen in 35 years of consulting in this industry," said Michael Ervin, senior vice-president at Kent Group Ltd., which monitors the retail gasoline industry. "It's just a panoply of mergers and acquisitions happening in the Canadian sector right now, and I don't think we've seen the last of it, for that matter."
When Loblaw first sought to sell its gas business about a year ago, the growth-minded Parkland was also seen as a potential suitor for the assets. But Loblaw executives weren't in a rush to unload the gas stations and were adamant that the company's loyalty program stay intact. They said that the gas bars weren't as relevant to the company's strategy as had been in the past, and that Loblaw could benefit from their presence without owning them. Still, then-executive chairman Galen Weston said that "only a very attractive price is going to compel us to sell."
Brookfield Business Partners is a newer arm of Brookfield Asset Management Inc., formed last year to buy and manage businesses that have, by its own description, high barriers to entry, low production costs and that could be helped by Brookfield's global experience as an owner and operator of real assets. The business targets returns of at least 15 per cent on its investments.
Operating efficiency is key in the retail gas sector, where the number of gas stations has been declining for 20 years, according to the Canadian Fuels Association. Average gasoline output per site increased during that time as the remaining stations grew in size. With low margins on the sale of gas, the extra services such as car washes and profits from convenience stores became more important to many operators. Mr. Ervin said that Loblaw's gas bar pricing and competition model was tied to cross-merchandising opportunities with the grocery business.
Michael Van Aelst, an analyst with TD Securities, said in a note that Loblaw gas stations move a high volume of gas, but added that the small kiosks and convenience stores have an operating agreement that "includes restrictions on what can be sold in the [store] to prevent undue competition with the adjacent grocery store, and we expect this agreement to remain intact." He also said that no real estate is included in the sale.
Brookfield hasn't been known as a gas station owner, but has been expanding into the fuels business in recent months. Brookfield Business Partners and its investors recently announced a deal for a controlling stake in road fuel and biodiesel company Greenergy Fuels Holdings Ltd., which is a major player in the U.K. but also has a presence in Canada. The company touted the investment as a way to increase its presence in the European market, but the company also said it would broaden Greenergy's "operations outside of the U.K. by leveraging our global presence."
That deal has yet to close, and the transaction with Loblaw is also subject to customary closing conditions and is expected to close in the third quarter of 2017.