Shares of wholesale and retail fuel distributor Sunoco LP (SUN 0.70%) are up 14% as of 12:06 p.m. EDT today, on the heels of the company's announcement that it will sell its wholly owned convenience stores to the parent company of 7-Eleven.
According to the corporate announcement, Sunoco will sell 1,110 of its wholly owned convenience stores to 7-Eleven for $3.3 billion plus fuel, merchandise, supplies and other inventories at the closing of the transaction. Also, as part of the deal, Sunoco will be the exclusive wholesale supplier of fuel for those locations as well as additional 7-Eleven locations. The deal in question will not include any of Sunoco's franchise locations across the country.
Also, as part of the announcement, Sunoco said it plans to divest its remaining wholly owned convenience stores in Texas, Oklahoma, and New Mexico. The only convenience stores it plans to retain are its 54 Aloha-branded stores in Hawaii.
The $3.3 billion in proceeds from this transaction will be used to pay down debt and general corporate purposes. Management expects the deal will reduce the company's leverage ratio to the 4.5-4.75 range (today it stands at 6.5). Once the deal is complete, and Sunoco resets its debt levels, it will allow the company to pursue growth in the wholesale business.
This transaction marks a pretty significant shift for Sunoco. In some sense, this needed to happen to clean up the company's balance sheet. It was already in trouble with its creditors, as its debt ratio was getting out of hand. However, this deal also eliminates one of the few avenues for growth in this business. It wasn't that long ago that building out its wholly owned retail network was a core part of Sunoco's growth strategy.
In the shorter term, this deal makes a ton of sense as it forces the company to focus on just being a wholesale fuel distributor and generating long-term, fixed-fee revenue from supply agreements. Longer term, though, it does constrain Sunoco's growth options. If you are looking for a very high yield with little growth, then this move certainly makes Sunoco more attractive, but don't expect massive payout increases in the future.