TravelCenters Of America - Enough Value To Feed Everyone Involved
Long/Short Equity, Deep Value
Seeking Alpha Analyst Since 2019
Individual investor. Previously, an investment analyst at Point72 Asset Management. Views are my own. I invest in what I like and what I find interesting.
Summary
- Near term headwinds have created a great buying opportunity in the stock.
- TA weathered the lockdown well (growing Adj. EBITDA by 24% in 2020) and is positioned well for a reopening trade.
- New, large outside shareholders are buying into the stock (three outside funds now own ~20% collectively).
- Private equity could take this out at 100% premium to closing price on 3/5/21; incentivize related parties with 5x the termination fee; and still only pay 7.5x LTM EBITDA or 7.4x LTM EBITDAR.
***If you are familiar with the name, you can skip down to the section where I discuss takeout scenarios.***
Quick Recap of Recent Events
TA operates and franchises travel centers and truck service facilities across the U.S. In 2020, the company improved adj. EBITDA by 24% y/y to $116.9mm; notwithstanding a 5% decrease in adj. fuel gross margins + nonfuel revenues (21% decrease in total revenues). However, the stock sold off 17% on the YE earnings report due to the following:
- An increased 2021 capex plan that included higher than normal maintenance capex and some growth/M&A capex.
- Fuel margin headwinds from the rapid rise in oil prices that are dragging into Q1 2021.
Addressing the Concerns
2021 capex plan. On the earnings call, mgmt laid out a $175-$200mm capex plan, of which half was earmarked for growth & bolt-on M&A initiatives with a 15%-20% cash on cash return hurdle. Still, $100mm for maintenance capex is higher than the typical $60-$80mm maintenance capex, but it sounds like a big chunk of the maintenance capex is a one-time expense to upgrade things like the credit card payment system.
Given the company's past performance with non-strategic M&A, investors seem nervous to give the company benefit of the doubt that they will execute well. However, that was old mgmt, and the c-suite has since been overhauled with a new CEO in Dec 2019 and a new CFO in Mar 2020 (and a new leadership team surrounding them). The CEO, Jon Pertchik, has turned around other businesses (most recently as CEO of InTown Suites) and is clearly doing so with TA as evident by the results mentioned above. He stated several times on the earnings call that the company will focus on M&A in its core areas with more owned locations being the top priority. Such a move would be significantly cash flow accretive since TA leases most of its locations (to a related party in full disclosure). Also on the earnings call, the CEO mentioned that TA will not reopen restaurants unless it's additive to the bottom line (regardless if allowed to reopen by government); so the mgmt team is being extremely disciplined.
Fuel gross margin. Fuel margins were compressed in 2H20 and look to remain so in Q1 2021 given the quick rise in oil prices. This volatile oil market should settle down as we get through reopening, which would in turn help TA return to a higher, more stable fuel margin. It is normal for fuel margins to ebb and flow as it did last year when margins widened in Q2 with the drop in oil prices. As such, for the year as a whole, fuel gross margins were only down 5% from 2019 (14.6 cpg in 2020 vs 15.4 cpg in 2019) which can be explained by the diesel volumes increasing 8% y/y while gasoline volumes decreased 16% y/y because diesel has a lower margin for TA. As the U.S. starts to reopen, you can expect to see gasoline volumes move up and margins start to stabilize and increase. For reference, in 2019, the quarterly fuel gross margin ranged from 15.2 cpg to 15.6 cpg at an average of 15.4 cpg for the year. If TA held fuel volumes flat from 2020 but recovered to a more normalized fuel margin as seen in 2019, the increase in earnings (before tax) would be $16mm.
Private Equity Could Buy Out TA at a 100%+ Premium on stock, 5x+ Related Party Termination Fee, and Still Pay a Much Lower Multiple than Recent Comps
Before we broach the topic of a takeout, it is important to address that TA has several related parties. First and foremost, the Chairman, Adam Portnoy, effectively owns 51.5% of the RMR Group LLC, which provides mgmt services to TA for a 0.6% fee of fuel gross margin + nonfuel revenues. This fee amounted to $12.5mm in 2020 and $13.4mm in 2019 and cannot be terminated without 60 day notice and a termination fee equal to 2.875x of the avg annual fee. RMR also owns 4.5% of TA shares. Secondly, TA leases most of its locations from Service Properties Trust ("SVC"). SVC is also controlled by RMR and owns 8.1% of TA shares.
Let's take a look at TA's current valuation. As of close 3/5/21, TA shares closed at $24.29 equating to a $354mm market cap with 14,571,018 shares outstanding. TA ended 2020 with $544mm in total debt and $483mm in cash for net debt of $61mm. As such, TA has an EV of $415mm or $2,289mm if you include the $1,874mm of lease obligations. In 2020, adj EBITDA came out to $116.9mm and adj EBITDAR was $371.4mm. As such, TA is trading at 3.55x LTM EBITDA and 6.16x LTM EBITDAR. Because of the related party transactions with major shareholders mentioned above and TA's (staggered) Board of Directors that is controlled by Adam Portnoy, TA often trades at a discount to peers. However, given the pullback in stock price along with earnings potential, it is impossible to ignore the disconnect in value that TA has and the potential to make everyone happy (public shareholders, related party shareholders, and potential buyer) in a takeout.
What's different and why now? TA is at the forefront of a changing dynamic in the U.S.'s infrastructure. As more and more cars shift to EVs and heavy-duty trucks shift to hydrogen, the network of charging/refueling stations to allow EVs/trucks to travel longer distances across the U.S. will be crucial. With over 270 locations, TA would be a great candidate to receive fed/local incentives and interest from ESG private equity funds to enable this critical transition. Blackstone's recent purchase of Applegreen in Dec 2020 is a great example of this, which I will discuss later. Also, per the last earnings call, TA is assembling a task force to handle this transition and has already RFP on charging stations at a couple of locations.
Moreover, three new outside shareholders now own ~20% of the shares outstanding which increases the likelihood of a deal getting done.
Math behind a potential takeout. As mentioned in the title of this section and in the summary bullet points, private equity could pay a cheap multiple and still feed both public shareholders & related party shareholders to get to an agreeable purchase price. TA currently has:
- 14.92mm fully diluted shares (to include 349k unvested shares as of 12/31/20)
- $24.29 close price as of 3/5/21
- Net Debt of $61mm and Lease Obligations of $1874mm
- LTM EBITDA of $116.9mm and LTM EBITDAR of $371.4mm
- Avg annual RMR mgmt fee of $13mm; making the termination fee $37.4mm
A private equity firm could thus pay $48.50 per share (100% premium to recent close) plus 5x the termination fee for $186.9mm as an incentive and only pay a multiple of 7.5x LTM EBITDA and 7.4x LTM EBITDAR (after adding back $13mm in annual mgmt fees saved).
Looking at the recent comp of Blackstone / Applegreen, Blackstone paid €718.1mm in market cap, assumed €638.9mm in net debt (as of 12/31/19), and assumed €685mm of lease obligations. Using the most recent publicly available numbers as of 6/30/20, Applegreen had a LTM EBITDA of €106.8mm and LTM EBITDAR of €177.6mm meaning Blackstone acquired the company for roughly 12.7x EBITDA and 11.5x EBITDAR. Now, I assume Applegreen's earnings improved in 2H20, but I think it is safe to assume that Blackstone paid a double-digit EBITDA multiple which would be in line with some other recent comps like the 7-11/Speedway deal. Using a 10x LTM EBITDA multiple for TA, an acquiror could pay $65/sh (167% premium to Friday's close) and pay a termination fee of 20x the avg annual mgmt fee as shown below:
Bottomline: TA could be acquired at a 167% premium at a deal that would be inline to recent comps and attractive to both the acquiror & current related party shareholders that effectively control the company. TA's business is actually extremely attractive for a PE firm given 1) its unique footprint to be at the forefront of America's transition to green infrastructure and 2) its room for improvement on both operations & debt cost of capital.
Analyst's Disclosure: I am/we are long TA.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.
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