UK petrol stations fuel investor frenzy
LONDON // More than 180 stalwarts of one of the United Kingdom’s least glamorous industries attended a celebration lunch at Claridge’s in London’s Mayfair this month.
They put away their high-vis vests and mops and buckets to pay tribute to Gerald Ronson, who has reached the milestone of 50 years in roadside retailing.
Mr Ronson, the property developer behind London’s Heron Tower, claims credit for turning petrol retailing into the business it is today, with bright, clean self-service forecourts; convenience stores selling groceries, freshly made sandwiches, fresh coffee and even wine, and TV dinners.
But there is also something else he claims credit for – attracting the eyes of some of the world’s biggest private equity investors, who have snapped up £3 billion (Dh15.94bn) worth of sites in the past year.
According to research by Barber Wadlow, a specialist property adviser to the petrol forecourt sector, 1,375 forecourts changed hands in 2015 – a 56 per cent increase on the previous year. Forecourt values climbed by 14 per cent last year, the fourth consecutive year of growth.
“The deals we’ve seen potentially value the sector at more than £3bn [a year],” says Adam Wadlow, the director of Barber Wadlow. “There has been a changing of the guard in petrol retailing. Only one oil major and one supermarket are now in the top five of UK retailers, which account for one in six forecourts in Britain. Three of the top five are now independent companies that are owned or invested in by private equity.”
The private equity binge began in July last year, when Clayton Dubilier & Rice, on whose board sits the former Tesco chief, Sir Terry Leahy, bought Motor Fuel Group (MFG) for £500 million. Then, in November last year, TDR Capital bought a minority stake in Eurogarages in a deal that valued the company at £1.3bn.
The culmination of this shopping spree came at the end of January, when the US private equity major Lone Star bought 448-site MRH, the sector’s third-biggest forecourt owner, in a deal thought to be worth £1bn.
It was the third private equity investment in the sector in seven months.
According to Mr Ronson, it was his landmark deal in 2011 with Total that alerted private equity investors to petrol retailing’s potential. Total sold its network of 810 forecourts to Rontec, the private business started by Mr Ronson as a fall back enterprise. “They woke up to it when I did the Total deal. It’s one of the best deals I’ve ever done in my life,” he says.
Last year, Mr Ronson merged his two petrol retailing businesses, Snax24 and Rontec, to create a £1.5bn turnover business. He reported a £24.5m annual profit this month and thinks the business could double in size in the next three to five years.
In 2005, the oil majors had 31 per cent of the market but by last year it was just 19 per cent. The supermarket growth story is also largely over, as the grocers have retrenched to concentrate on the problems in their own sector.
Shell, Esso and Total sold off most of their forecourt estates in order to concentrate on upstream activities, after years of making little money from them. Shell is expected to bring a further tranche of sites to the market this year.
Esso sold 201 sites last year, retaining only a portfolio of about 200 sites in an alliance with the UK grocer Tesco, while Shell sold 158 forecourts in 2015, retaining about 600. In previous years, Murco and Texaco also sold up to independents.
However, the average driver will not realise that the oil majors are pulling out because Esso and Shell struck 10-year fuel supply and branding agreements with the new owners of the forecourts.
BP alone among the oil majors plans to remain in forecourts, largely through a partnership with Marks & Spencer.
Forecourt sales by the oil companies may have triggered the spate of deals, but there are also about 4,000 independent businesses in the sector, many of which could be snapped up.
One of the companies that is set to be most active is Eurogarages, which is owned by Mohsin and Zuber Issa, two brothers based in Blackburn, north-west England. They started the business in 2001 with just £5,000. The firm has grown from a single site in 2001 to 339 today, and is the one company among its peers that is tipped to break into Europe.
Despite TDR Capital taking a 20 per cent stake, the brothers remain firmly in charge and have confirmed that they are set on international expansion. TDR, which already owns 1,000 forecourts in Belgium, the Netherlands and France, should be able to accelerate their acquisitions.
Another investor looking to expand is Clayton Dubilier & Rice, the new owner of MFG, the UK’s fourth-largest petrol retailer.
Dave Novak, a director of MFG, says that he expects the motor fuel group to open 100 to 200 more sites in the next three to five years.
Besides the 370 sites MFG owns, it also supplies to a further 200. “A key trend in retail in the UK is convenience and we believe the petrol station model is underdeveloped. As the size of the business grows, then a more sophisticated retail proposition becomes available,” Mr Novak says.
There will also be heat from Lone Star-owned MRH, where Karen Dickens, a former Esso retail boss, started as the chief executive in March. Meanwhile just outside the top 10 independent retailers, HKS, another family business with 57 sites, has hired a former BP retail director as chairman for its own growth push.
The backdrop to this wave of change has been the loss of a third of petrol forecourts across the UK since 2000. The total number is now down to about 8,500.
When the housing market was racing in 2005 to 2007, many forecourts were sold for housing land. “The loss of a third of the network means that the underlying value of forecourts has improved. Developing a forecourt costs at least £1.5m, so the supply is set to remain stable for some years to come,” Mr Wadlow says.
But the real attraction for private equity investors is that many of the sites coming up for sale are underdeveloped retail businesses, underpinned by a real estate asset.
“The new operators really understand retail and they will make the retail business work far harder,” says Rob Colville of CBRE, a property consultancy. “They are bringing in other brands, including Greggs, Subway, Burger King and Starbucks, and they understand the value of high-margin baked goods, ready meals and hot drinks.”
Mr Colville believes the new owners will sweat the assets and will look at future uses, including possible click-and-collect sites for retailers, for Royal Mail or for Amazon. Even a shift away from petrol-powered cars should not diminish the forecourts’ value, as their locations and design make them highly suitable for electric car charging points.
Private equity owners might have alighted on roadside retailing as the next big asset class with strong cash flows, but some of the entrepreneurs who have been in the business for a while might well wonder what took them so long.
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Updated: April 26, 2016 04:00 AM