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Why SUN Rallied 20% after Convenience Store Sale Announcement

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Convenience store sale

On April 6, 2017, Sunoco (SUN) announced the sale of 1,110 convenience stores to 7-Eleven in a deal valued at $3.3 billion. The partnership expects to divest 207 more convenience stores located in West Texas, New Mexico, North Texas, and Oklahoma. Sunoco plans to retain Aloha Petroleum and APlus franchisee-operated stores. Going forward, the partnership intends to focus on its wholesale distribution business.

SUN also entered a long-term take-or-pay agreement with 7-Eleven to supply 2.2 billion gallons per year of fuel to the sold retail outlets. Wholesale volumes sold to 7-Eleven will account for ~29% of SUN’s total wholesale volume.

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According to Bob Owens, SUN’s CEO, “The sale of these retail assets to 7-Eleven is the beginning of an exciting evolution for SUN into a premier nationwide fuel supplier. Our supply agreement with 7-Eleven provides SUN with a predictable long-term income stream, and this transaction quickly allows SUN to improve its financial profile.”

SUN is expecting to close the transaction by the end of 4Q17. Moreover, the partnership is expecting to announce the divestiture of the remaining convenience stores to be sold in mid-2017.

Stock price reaction

Sunoco’s divestiture announcement received a big thumbs up from investors. SUN closed 20.2% higher following the announcement on Thursday. Energy Transfer Equity (ETE), which owns the GP (general partner) of SUN, closed 1.8% higher. At the same time, the Alerian MLP ETF (AMLP), which consists of 25 energy MLPs, was up 0.7%. Investors welcomed Sunoco LP’s divestiture announcement, as the partnership has been struggling with a bad balance sheet position for quite some time. SUN is expected to use the proceeds from this transaction mainly for debt repayment to bring down its leverage. Moreover, the supply agreement with 7-Eleven will likely stabilize SUN’s income stream given the uncertainty in gasoline prices.

In the next article, we’ll elaborate on the rationale behind this asset divestiture.

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