Summary
- BP p.l.c. has announced the purchase of TravelCenters of America, an RMR affiliate.
- The transaction will monetize some RMR equity assets and accelerate some fee payments to RMR.
- The RMR Group’s shares look to remain undervalued.
On February 16th, BP p.l.c. ( BP ) announced it would acquire TravelCenters of America ( TA ) for $86.00/share in cash (an 84% premium to TA's 30-day VWAP). BP will spend $1.3 billion to expand its distribution network of roadside fuel, EV charging, and convenience stations. The acquisition facilitates BP's objectives to smoothly expand sales while the world transitions to cleaner energy, but it is also a big win for TA and its affiliate, The RMR Group ( RMR ).
Ever since the Inflation Reduction Act (IRA) was passed in August of 2022, we have scoured the markets in search of companies that could accretively optimize the Act's bounty of clean energy tax credits. January 30th's announcement that TravelCenters of America had entered an agreement with Electrify America to install 1,000 EV fast chargers at 200 locations nationwide was exciting news.
We were already familiar with TA and that was a problem; TA is an RMR company. Dane Bowler has long decried the dangers of investing in REITs or other companies advised by The RMR Group, a $37 billion alternative asset manager based in Newton, MA. RMR affiliated companies' shares often trade at tantalizing discounts to their demonstrable intrinsic values, but, over the last two decades, we saw that RMR's management decisions were routinely averse to shareholder interests.
TA's bold infrastructure plans to build a nationwide network of 1,000 fast EV chargers was commendable, but was saddled with two problems. First, even though they were joint venturing with the expertise of Electrify America, it would be a huge investment, and we weren't convinced TA was sufficiently capitalized to swing it. Second, and that was the killer, we lacked confidence that RMR would help them get it done. We passed on the shares and had to wait only two weeks to regret it.
BP Seizes the Opportunity
BP is in the business of selling gasoline, diesel, and, increasingly, EV electricity throughout the country. TravelCenters' 200 roadside outlets dovetail nicely with BP's existing portfolio and the acquisition seamlessly enables BP to sell more fuel, coffee, food and convenience through TA's stores and restaurants. BP has an A3/A- credit, capital scale, and, importantly, is unentangled with RMR. This is a winning move by BP, and I'm long the shares, but BP is not the only winner in this deal.
TA shareholders nearly doubled their investment on the heels of the announcement; among the top shareholders was The RMR Group.
The $86/share buyout will pay RMR $53.48MM at closing. This translates to $3.43 per RMR Share. Measured against RMR's current $30 share price, the sum is material. But there's more.
As an asset manager, RMR is contractually entitled to receive management/consulting fees. The contracts are iron-clad and often carry strict terms (penalties) regarding early termination or change of control. In the Business Management Agreement described in Item 12 of TA's 10K , we can see that the BP transaction should trigger the change of control/termination clause.
Using the 2021 fee of $14.04MM as a base, we calculate that the termination fee would come to $40.25MM. This translates to an additional $2.58/share due RMR. Combining the termination fee with the buyout proceeds and RMR should see $6.01/share at closing.
We anticipate that the 2022 fee would be 15%-20% higher than 2021 and that the termination fee will be in the $2.90 to $3.00/share range. Again, measured against RMR's current $30 share price the sum of $6.00 -$6.40/share is material, so we are now long RMR.
RMR Post-transaction
Buying $30 shares because you expect a company to turn a portion of its assets into $6 in cash only makes sense if you think what remains is worth more. So, let's look at what remains.
On February 2nd, RMR reported their fiscal 1Q23 results. Within that report, they break their asset management business into two categories: Perpetual Capital AUM and Private Capital AUM
In the Perpetual Capital stack, TravelCenters of America accounted for $1.89B of Fee-Earning AUM, or about 8.3% of Perpetual AUM.
If you combine the Perpetual AUM with the Private Capital AUM, it sums to approximately $26.9B total Fee-Earning AUM and TA represents about 7% of that total. So, the $6 received from the BP transaction represents 20% of the current share price, but reduces RMR's Fee-Earning AUM by only 7%. And you still have the $6, but there's more.
RMR's largest AUM asset is Service Properties Trust ( SVC ) which also happens to be a material party to the BP/TA transaction. With a $9.09B AUM valuation, SVC represents 39.9% of RMR's Perpetual Capital AUM. SVC owns 189 TA properties that will now be operated by BP. BP has just signed a new 10-year lease for these properties and will pay annual rents to SVC that will annually average approximately $20.5MM higher than what TA paid. BP will be SVC's largest tenant (accounting for more than 29% of gross assets) and has an investment grade credit rating. These terms translate to meaningfully higher revenue for SVC, which in turn translate to higher revenue to RMR.
In Summary
BP's acquisition serves as a valuable tool in its ambitious plans to transition into the green energy economy. TA shareholders will realize full value of their impressive business. RMR left no money on the table in monetizing a small asset while, at the same time, strengthening the value of its largest asset.
We need to see more win-win-win-win transactions like this one.
For further details see:
The RMR Group Wins Big In The BP Buyout Of TravelCenters of America