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MLPs and the Convenience Store / Petroleum Marketing Industry

MLP is an acronym for Master Limited Partnership, a type of legal business entity that has been in existence for nearly 30 years. More notably, MLPs have become quite popular across the convenience store industry in recent years as major factors in mergers and acquisitions, such as the recent example of ETP's purchase of Susser Holdings. This particular acquisition annexed 540 Stripes locations to ETP's Sunoco presence in the U.S. southwest.

The Basics behind the Master Limited Partnership

The MLP is a type of limited partnership (LP), but one that can be publicly traded, unlike the traditional, more prevalent LP. MLP entity tax benefits came to be as a result of the Tax Reform Act of 1986. The federal government approved the Act to help facilitate investment in energy-related infrastructure projects, such as oil pipelines, by affording the MLP an alternative corporate tax status. Since the establishment of early MLPs, many of these entities leveraged their tax benefits to explore a sundry of other sectors and industries.

According to the Tax Reform Act of 1986, in order for any partnership or organization to qualify for the legal classification of an MLP, said organization must derive at least 90 percent of its cash flows from real estate, natural resources and/or commodities. In the modern era, the vast majority of MLPs generate revenues from the production, processing, storage and distribution of oil, natural gas, coal and refined products. This distribution and sale of refined products is why we see MLPs as a recurring theme among recent acquisitions in the convenience store industry.

MLPs, the C-Store Industry and the Employment Outlook

Since MLPs are classified as partnerships, they are not required to pay corporate income tax at state and federal levels. Traditional S and C corporations face double taxation on their own income. In contrast, income earned by an MLP is passed through directly to the owners—the public investors. Additionally, MLPs commonly benefit from a higher valuation multiple as a publicly traded partnership when compared with a traditional corporation. This plays into the valuation process associated with mergers and acquisitions and also opens up a sudden cash infusion that could be used to expand and solidify already successful convenience store chains.

Some analysts argue that the MLP movement within the c-store industry has brought about a means of aligning an otherwise fragmented business sector. To date, nearly 65 percent of U.S. convenience stores are owned by mom-and-pop owners and franchisees, entities owning 10 or less stores. This provides for comparably weak purchasing power and narrow profit margins, making it hard for these operators to compete with the larger conglomerates and even more difficult to resist their tempting buyout offers.

Yet, the outcome for support staff and employees of these potential acquisition targets may face mixed futures. In some cases, transactions involving MLPs bring much needed cash infusions to revitalize storefronts and fund expansions. However, such corporate takeovers can also result in job losses, often involving the elimination of redundant corporate positions. In other cases, employees of mom-and-pop operations are suddenly required to sign employment contracts and/or conform to new policies and cultures. This can add undue stress and confusion to an already turbulent transition.

Noted Wells Fargo securities analyst Bonnie Herzog commented on this trend by observing how MLPs have become a prominent tool for c-store operators to gain a competitive advantage and to protect their employees' futures by increasing earnings over the long-term. Herzog said, It’s a very fragmented industry and it will continue to consolidate."

Resources:

"Editor's Note: Susser and the Future of MLPs." CSPnet. N.p., n.d. Web. 07 Aug. 2015.
"MLPs: Sign of the Times - Convenience Store Decisions." Convenience Store Decisions. N.p., 22 Sept. 2014. Web. 07 Aug. 2015.
"Master Limited Partnership (MLP) Definition | Investopedia." Investopedia. N.p., 24 Nov. 2003. Web. 07 Aug. 2015.
"Benefits of MLPs." Benefits of MLPs. N.p., n.d. Web. 07 Aug. 2015.

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