Davy stocks analyst Allan Smylie sent out a research note to clients on Applegreen in early October, advising there was plenty of value in the fuel forecourt retailer's beaten-down stock for investors prepared to "do the work".
It turns out the company’s main shareholders were already busy.
Applegreen revealed on Thursday that chief executive Robert Etchingham and chief operations officer Joseph Barrett, who own 41.3 per cent of the company between them, had joined forces with an arm of US investment giant Blackstone to plot a takeover bid valuing the company at almost €694 million.
It's understood the consortium made an initial approach to Applegreen's independent directors, led by chairman Danny Kitchen, in August.
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The proposed offer of €5.75 per share marks a 48 per cent premium to Applegreen’s closing price on Wednesday. It is 50 per cent above the €3.80 price at which the company floated on the stock market in June 2015, and a multiple of the €2.05 low hit in March when the group’s markets across Republic, the UK and the US went into Covid-19 lockdown.
However, investors that came on board in September 2018, as Applegreen sold €175 million of shares at €6.08-a-piece to fund its transformational purchase of a controlling stake in UK forecourt operator Welcome Break, faces losses. As do those that backed a €47 million share placing the previous year.
Shares in Applegreen were down 31 per cent in 2020 before news of the bid approach broke this week, even after demonstrating its resilience during the worst of the coronavirus shock.
The group sees itself as a food company first and fuel provider second. It saw revenue decline by 27 per cent in the first half of the year to €1.1 billion, with the company responding through temporary staff layoffs, the use of government wage subsidies, scrapping of a planned dividend, deferral of executive bonuses, and squeezing rent cuts or holidays out of landlords.
Still, Applegreen – which had seen its number of sites treble since the flotation to total 559 at the end of June in Ireland, the UK, and the US – has not lost its appetite for expansion.
In September, Applegreen said it was part of a consortium that had been awarded a contract to develop 27 motorway service areas along the 917km New York State Thruway.
The US remains the biggest gas-guzzling nation on the planet, but its network of petrol stations is well behind Ireland and the UK in terms of food and other convenience offerings.
Complex
Much of the Irish group’s recent growth, particularly in the US, has been through joint ventures that shrewdly minimise the capital outlay for Applegreen – allowing it to focus on the high-margin stuff that it’s good at. But this has also made the group more complex for investors to get their heads around.
Its headline net debt pile of €480.9 million as of the end of August “appears high”, according to Smylie. It equates to more than 5.3 times Applegreen’s estimated earnings before interest, tax, depreciation and amortisation (ebitda) for this year.
But while the analyst notes that almost three-quarters of the borrowings sit within Welcome Break, which is 100 per cent consolidated on the group’s balance sheet even though it owns only 50.01 per cent of the business, it appears the market has been unwilling to dig deeper to see that “core” leverage is only 2.2 times earnings.
Brexit, which is bound to hit consumption in Ireland and the UK, irrespective of whether a trade deal can be pulled off, has only added to the stock’s woes.
The relatively low level of liquidity in the shares as more than 40 per cent remain in the hands of the founders has also been a turnoff for many potential investors. Meanwhile, the explosion of environmental, social and corporate governance (ESG) investing this year, as Covid-19 has brought climate change to the fore, has made fuel retailers a no-no for many big money managers.
The move to take Applegreen private comes as fuel retailers face the era of the electric vehicle.
Opportunities
Barrett predicted in an interview last month that 40 per cent of new cars bought in 2040 would be electric, offering Applegreen further opportunities to push its retail and ancillary offerings. The company charges 1,500 electric vehicles daily across its locations, with a dwell time for customers of about 25 minutes.
Installing charging facilities, however, is expensive. The Irish Petrol Retailers Association estimates a bank of three fast-charging stations costs €250,000-€300,000. Then there’s the risk that the technology quickly becomes obsolete, or drivers opt to charge their vehicles at home or in handier locations like supermarket car parks.
However, Etchingham (66), who founded the business in 1992 with one station in Ballyfermot in west Dublin, and Barrett (54), who joined a year later, appear confident Applegreen will be a winner from the transition – away from the public market.
The duo placed €21.7 million of their own shares in the market at the time of the IPO and sold a further €27 million of stock the following year. Their remaining holding – split 75:25 in favour of Etchingham – is valued at €287 million by the proposed offer. While they plan to retain a “significant equity stake” in the business, it’s expected they will take some money off the table as part of the deal.
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Applegreen's 2015 flotation gave Dublin's Iseq index its first pure retail stock since department store Arnotts was taken private in 2003. Its exit will leave the market as even less of a reflection of the Irish economy.
Meanwhile, Etchingham and Barrett’s bid partner, Blackstone’s infrastructure arm, will be hoping the deal turns out better than a disastrous Irish investment by another part of the US group in recent years.
Blackstone Real Estate is facing more than €200 million of losses on the equity and loans it committed to its €950 million purchase in 2016 of the Blanchardstown Centre, which is in the process of being taken over by creditor Goldman Sachs.
