Alon USA, which began spinning off its Alon Brands subsidiary last November, is currently answering the second round of questions from the Securities and Exchange Commission (SEC) before it can take its new subsidiary public.
“We have an excellent business model, and expect to have all the documentation we need to move forward finalized in the second quarter,” Alon CEO Jeff Morris said. “At that point, we’ll simply be waiting for what we think is the appropriate time to go public, when the (stock) market is ready.”
The fact that the spinoff may take a bit longer isn’t dampening the enthusiasm of Alon Brands CEO Kyle McKeen. “It’s exciting—it’s the reason I came back to Alon,” McKeen said. “The overall retail market today is getting smacked around pretty soundly, but when you look at convenience store retailing in the Southwest and Southeast, it’s a great story.”
Alon Brands’ properties include Southwest Convenience Stores, operator of more than 200 7-Eleven convenience stores and the FINA fuel brand.
The reason for the spinoff, McKeen said, is that when the parent company seeks capital it doesn’t get enough recognition and credit. The fact that it’s the largest 7-Eleven licensee in the U.S., and the sole licensee of the FINA brand isn’t recognized for the enormous profit potential each one has.“Now, (the c-store segment) is just a part of our overall refining business,” McKeen noted. “When you break it out, you have something that actually trades at greater multiples than a strict refining business.”
The value c-store and gasoline sales provide to Alon USA is really the ratable offtake of fuel products, McKeen said, because the revenue and the margins generated by the stores aren’t large enough to be significant to the parent business. “When you’re a small segment in a large company, you don’t get the same attention, and when you compare a retail business to a refining business, you’re rarely the winner from either a scale or return perspective,” he explained. “The logic is that we already have an arrangement for ratable offtake and, by forming an outside entity that can use its marketing expertise to forage for capital on its own, we’re better off.”
Focused on Retail Operations
Refineries tend to be extremely capital-intensive, McKeen said, especially those that, for the last 10 years, have been driven by regulation and mandate. “It’s not money that’s been spent to enhance the ability of the refinery, but to comply with environmental regulations,” he said. “I’m not saying that’s bad, but when you’re competing with government-mandated expenditures, you don’t really have much chance to do large upgrades on your convenience store network.”
Many of the oil majors are selling off their retail segments, electing to simply arrange for ratable offtake instead. However, McKeen feels strongly that because Alon’s stores are located in high-growth markets and have two strong brands in 7-Eleven and FINA, the new company will be a huge success. “We have a renewed focus and a very motivated leadership team,” he said. “Those things all add up to a win.”
Nor does a sputtering economy worry McKeen. “When fuel prices escalated last summer, we saw people making the same dollar transaction more often, which helped our business,” he said. “The same happens here—as people reduce their transaction size, c-stores can benefit. Besides, today people feel $2 gas is cheap.”
Alon USA, itself a subsidiary of Israel’s Alon Energy, will retain ownership of 55% of the new company, the SEC filing shows. The company has applied to take the proposed ticker of “ABO” on the New York Stock Exchange.