Summary
- Shares of TravelCenters of America soared higher after news broke that the company was being acquired by energy giant BP.
- This move higher creates great returns for shareholders in TravelCenters of America while allowing BP to get a great business for a great price.
- Shares offer a bit of upside from here and the stock looks undervalued in the event that the deal in question were to fail.
Feb. 16 proved to be a monumental day for investors in TravelCenters of America ( TA ). The company, which focuses on providing various services for travelers, particularly truck drivers, in the form of fuel, travel amenities, and more, saw its stock skyrocket roughly 70.6% after news broke that energy behemoth BP ( BP ) struck a deal to buy the company at a significant premium compared to where it was trading at previously. At this point, most investors might be tempted to sell out of their position in the firm. I can definitely understand the sentiment and it's not necessarily an unwise move to make. Having said that, given how cheap shares still are and the fact that some additional upside exists should the deal come to completion, I would say that it still warrants a soft "buy" rating at this time.
A great return for shareholders
The last article that I wrote about TravelCenters of America was published in the middle of November of 2022. In that article, I talked about how well the company had done throughout 2022, with shares significantly outperforming the market in response to robust fundamental performance and a share price that was trading on the cheap. Even with shares having risen significantly up to that point, I could not help but to keep the "buy" rating I previously assigned the company because of both its continued cheap share price and restructuring activities that aimed to create additional long-term value for investors. Looking back on the picture, I now regret not taking my own advice and purchasing shares in the business. Since the publication of that article in the middle of November, the stock has generated a return of 63.8%. That compares to the 3.7% rise experienced by the S&P 500 over the same window of time. Compared to when I initially rated the company a "buy" back in June of 2021, the return disparity is even greater. Shares are up 194% compared to the 1.7% drop the market experienced.
The lion’s share of the increase recently can be chalked up to news that BP has decided to acquire TravelCenters of America in a deal valued at $86 per share. That represents an 84% premium over the $46.68 that the stock averaged in the 30 days through Feb. 15. The nature of the transaction is fairly simple, with the purchase price being paid in all cash. This works out to roughly $1.28 billion, a figure that management, for the purpose of simplicity, rounded up to $1.3 billion in their press release. Of course, there are other ways to look at what the actual price of the acquisition is. This is where investors in both companies need to be careful. Financial shenanigans are abound.
Although the cash purchase price of TravelCenters of America is indisputable, the management team at BP described the total purchase price, on an enterprise value basis, as being $3.5 billion. I struggle with this number because, strictly speaking, I would not consider it that high a price. Cash in excess of debt as of the end of the third quarter last year came in at $57 million. The acquirer also is factoring in $0.1 billion associated with what it calls the "brand purchase." However, the headline purchase price of $3.5 billion includes $2.1 billion in lease obligations that come with TravelCenters of America. This is basically the present value of lease payments using BP’s discount rate. This is not a typical component in calculating enterprise value. When I calculate enterprise value for a business, I do include finance leases into the equation when they're broken out in a company's financial statements. But these are operating leases that do not transfer the ownership of the assets over to TravelCenters of America upon completion of all required payments. To the credit of the management team at BP, they do also provide a calculation excluding the capitalized leases that comes out to roughly $1.4 billion. My own calculation pegs this closer at $1.33 billion, but that excludes the brand purchase included by the parties. In the hopes of closing the deal, TravelCenters of America received support from two major shareholders. One of these is The RMR Group ( RMR ), which provides property management services for it. That particular player, which owns 4.1% of TravelCenters of America’s stock, will also receive a $44 million termination fee as a result of this transaction.
When evaluating the deal, it's also important to note that BP uses a trailing 12-month EBITDA for the company of $600 million. This is after adding back in the required lease payments. Based on the calculations I performed when I last wrote about the business, a more realistic calculation for EBITDA comes out to $347.5 million. That's in line with the $0.3 billion number that BP included in its investor presentation for the scenario where you exclude leases. It's important to note, however, that the $600 million figure does include some other interesting information. This involves BP’s expectations for the assets that they are acquiring.
Through a combination of organic growth and an improving competitive environment, higher profits from biofuel and fuel supply changes, and various fleet, convenience, and operating expenditure synergies, BP expects that $600 million to grow to around $800 million by the 2025 fiscal year. The synergies in question will involve things like integrating premium loyalty programs, initiating global procurement, digital transformation, and standardization across the two firms, and more. The fuel supply side of things is even more obvious when you consider just how massive a player BP is in the fuel space. There's also the benefit to BP in the sense that TravelCenters of America well further diversify its revenue and profit streams. This is especially true when you consider that, just last month, TravelCenters of America announced that it entered into an agreement with Electrify America to expand electric vehicle infrastructure, with the goal of bringing 1,000 individual chargers to 200 of TravelCenters of America’s locations over the next five years. Given that the days of fossil fuels are numbered, this kind of diversification looks great.
Clearly, the amount of upside that investors in TravelCenters of America are seeing is fantastic. Having said that, I do think that it wouldn't be a bad idea to still consider this a soft "buy." Using my own calculations based on historical financial performance, as well as the calculated purchase price of the firm, I figured that, if the deal does get completed, it will be done at a price-to-earnings multiple of 8.5. The price to adjusted operating cash flow multiple should be 4.7, while the EV to EBITDA multiple should be even lower at 3.8. While it would be no surprise to see shares immediately fall if the deal fell through, I still think that the stock looks cheap even at the buyout price. In addition to that, shares of TravelCenters of America are currently trading at $84.35. That offers roughly 2% of additional upside between now and the time that the transaction is completed, which is slated to be sometime in the middle of this year. This may not seem like much, but a nearly guaranteed 2% in such a volatile market is not a horrible situation to find yourself in.
Takeaway
Based on all the data provided, I will say that, not only am I happy for shareholders of both firms, I also regret not acquiring stock in TravelCenters of America myself. I run a very concentrated portfolio and this tends to result in several missed opportunities. And few missed opportunities are likely to be as big as this one. As for moving forward, I still do think that TravelCenters of America could make sense to buy into, so long as investors in the company believe that the transaction will be completed. This allows them to lock in, contingent on the completion of the deal, a modest amount of upside, while still buying stock in a business that is trading at incredibly cheap levels. Because of this, I do believe that a soft "buy" rating is appropriate at this time.
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A Great Outcome For Both TravelCenters of America And BP