FEMSA to enter the Convenience Store Industry in the United States

Rhea-AI Summary

FEMSA (NYSE: FMX) has announced its entry into the US convenience store industry by acquiring Delek's retail operations for $385 million. The deal includes 249 convenience stores, primarily located in Texas, operating under the DK brand. This strategic move allows FEMSA to tap into the $850 billion US convenience and mobility market, leveraging its OXXO brand expertise.

The acquisition aligns with FEMSA's long-term ambition to expand into the US market, utilizing its extensive retail experience from operations in Mexico and other countries. The transaction is expected to close in the second half of 2024, subject to regulatory approvals.

Positive

• Expansion into the lucrative US convenience store market with a $850 billion total addressable market
• Acquisition of 249 convenience stores for $385 million, providing immediate market entry
• Strategic fit with FEMSA's existing retail expertise and OXXO brand
• Potential for future growth and value creation in a fragmented market

Negative

• Significant capital investment required for the acquisition
• Potential challenges in adapting to a new market and regulatory environment
• Integration risks associated with acquiring an existing retail network

Insights

Financial Analyst

FEMSA's acquisition of Delek's retail operations marks a significant strategic move into the US convenience store market. The $385 million deal for 249 stores, primarily in Texas, represents a calculated entry point with an average cost of about $1.5 million per store. This pricing appears reasonable given the included assets and potential for growth.

The US convenience store market, valued at over $850 billion, presents a substantial opportunity for FEMSA. With over 150,000 locations and significant fragmentation, there's ample room for a player with FEMSA's expertise to gain market share. The company's experience with OXXO in Mexico and other countries provides a strong foundation for this expansion.

However, investors should note that this is just the first step in a broader strategy. The initial 249 stores represent a small fraction of the market and significant investment and time will be required to achieve meaningful scale. The success of this venture will depend on FEMSA's ability to transfer its operational expertise to the US market and navigate potential cultural and regulatory differences.

For Delek, this divestiture aligns with its strategy to focus on its core petroleum refining business. The sale should provide Delek with additional capital to reinvest in its primary operations or reduce debt, potentially enhancing shareholder value.

Overall, while this move presents exciting growth prospects for FEMSA, investors should maintain a balanced view, considering both the potential rewards and the challenges of entering a new, highly competitive market.

Market Research Analyst

FEMSA's entry into the US convenience store market through the acquisition of Delek's retail operations is a strategic move that warrants close attention. The US convenience store industry, with its $850 billion market size, offers significant growth potential, especially for a company with FEMSA's retail expertise.

The focus on Texas, which accounts for 90% of the acquired stores, is particularly noteworthy. Texas has a large Hispanic population, which could provide FEMSA an opportunity to leverage its OXXO brand recognition and tailor its offerings to this demographic. However, the company will need to carefully navigate the competitive landscape, as established players like 7-Eleven and Circle K have a strong presence in the state.

The acquisition also includes fuel stations, which aligns with the broader trend of "convenience and mobility" in the industry. This integrated approach could provide FEMSA with multiple revenue streams and opportunities for cross-promotion.

It's important to note that FEMSA refers to this as their "first step" in the US market. This suggests a long-term growth strategy, potentially involving further acquisitions or organic expansion. The company's emphasis on "experimentation, testing and fine-tuning" indicates a cautious approach, which is prudent given the differences between the US and Mexican markets.

While FEMSA's extensive experience in retail operations is a significant advantage, the company will need to adapt to US consumer preferences, regulatory environment and competitive dynamics. The success of this venture will largely depend on FEMSA's ability to transfer its core competencies while remaining flexible to local market conditions.

Legal Expert

The acquisition of Delek's retail operations by FEMSA presents several legal considerations that investors should be aware of. Firstly, the transaction is subject to regulatory approvals, which is standard for cross-border acquisitions of this scale. Given that FEMSA is a Mexican company entering the US market, there may be scrutiny from bodies such as the Committee on Foreign Investment in the United States (CFIUS).

The structure of the deal as a "cash-free, debt-free basis" acquisition is noteworthy from a legal perspective. This approach typically simplifies the transaction by excluding certain financial liabilities from the purchase, but it requires careful due diligence to ensure all relevant assets and liabilities are properly accounted for.

The carve-out nature of the transaction, where Delek is selling its retail operations while retaining its core refining business, adds complexity. This will likely involve detailed separation agreements to ensure a smooth transition of assets, employees and operations. The mention of a "small fuel transportation fleet" in the deal also suggests that transportation regulations and licenses will need to be addressed.

Furthermore, as FEMSA enters the US convenience store market, it will need to navigate a new regulatory landscape. This includes compliance with state and federal laws regarding the sale of age-restricted products like alcohol and tobacco, food safety regulations and labor laws. The company's experience in other markets will be valuable, but adapting to US-specific regulations will be crucial.

Lastly, the potential use of the OXXO brand in certain markets served by the DK stores raises trademark and branding legal considerations. FEMSA will need to ensure it has the necessary rights to use the OXXO brand in the US and that it doesn't infringe on any existing trademarks.

MONTERREY, Mexico, Aug. 01, 2024 (GLOBE NEWSWIRE) -- Fomento Económico Mexicano, S.A.B. de C.V. (“FEMSA” or the “Company”) (NYSE: FMX; BMV: FEMSAUBD, FEMSAUB) announced today that it has entered into definitive agreements with Delek US Holdings, Inc. (“Delek”) (NYSE: DK), to acquire Delek’s retail operations, consisting of 249 convenience stores located mainly in Texas, for a total amount of US$385 million dollars on a cash-free, debt-free basis, including the purchase of inventories.

Delek’s Retail Assets
Delek is a downstream energy company, with a focus on petroleum refining; its retail operations are being carved out for this transaction. Operating under the DK brand, approximately 90% of Delek’s convenience stores are in the state of Texas, with the remaining sites located mostly in New Mexico and a small presence in Arkansas. Almost all stores have a gas station under the DK and Alon fuel banners; the transaction also includes a small fuel transportation fleet.

Transaction Rationale
With a total addressable market of more than US$850 billion, over 150,000 locations, and significant fragmentation, the US convenience and mobility market is attractive for operators with the right capabilities and sufficient scale. For FEMSA, this market offers high strategic fit, and presents an opportunity to build a platform that, over time, has the potential to achieve scale and create shareholder value. The Delek stores have the right set of attributes to be FEMSA’s first step on this journey, in terms of size, geographical footprint, and possibilities for extensive experimentation, testing, and fine-tuning of the Company’s convenience value proposition.

Through OXXO, FEMSA has built considerable experience and expertise developing core retail capabilities for store expansion, procurement, supply chain, segmentation, and pricing, and these capabilities will be invaluable as the Company launches and pursues its US convenience strategy.  While the strategy is ultimately broader than any single region or target demographic, the appeal of the OXXO brand may be relevant in certain markets served by the DK stores.  

José Antonio Fernández Garza-Lagüera, CEO of FEMSA’s retail operations, commented:
“At FEMSA, we have a long-held ambition to enter the US convenience and mobility industry, and this transaction represents the ideal way for us to take our first step in this compelling market. We have been building and expanding our retail operation in Mexico for over 45 years, eventually reaching ten other countries in South America and Europe, and a store base of more than 30,000 locations. As we welcome our new DK colleagues into the FEMSA family, we are excited to embark on this new and important journey together.”

Avigal Soreq, President, and Chief Executive Officer of Delek, said, “The sale of Delek US Retail to FEMSA is an incremental step in our commitment to unlock the sum of the parts value inherent in our system. We are pleased with this transaction and expect to execute on additional steps to unlock value for our stakeholders.  Importantly, it allows us to gain a competitive partner for ongoing and expanded retail fuel sales. We look forward to building on this partnership with FEMSA in both the short and long-term. The transaction creates an exciting opportunity for Delek US Retail and its employees as they become part of FEMSA’s growth strategy in the United States.”

The transaction is subject to customary regulatory approvals and is expected to close during the second half of 2024.

About FEMSA
FEMSA is a company that creates economic and social value through companies and institutions and strives to be the best employer and neighbor to the communities in which it operates. It participates in the retail industry through a Proximity Americas Division operating OXXO, a small-format store chain, and other related retail formats, and Proximity Europe which includes Valora, our European retail unit which operates convenience and foodvenience formats. In the retail industry it also participates though a Health Division, which includes drugstores and related activities and Digital@FEMSA, which includes Spin by OXXO and Spin Premia, among other digital financial services initiatives. In the beverage industry, it participates through Coca-Cola FEMSA, the largest franchise bottler of Coca-Cola products in the world by volume. Across its business units, FEMSA has more than 392,000 employees in 18 countries. FEMSA is a member of the Dow Jones Sustainability MILA Pacific Alliance, the FTSE4Good Emerging Index and the Mexican Stock Exchange Sustainability Index: S&P/BMV Total México ESG, among other indexes that evaluate its sustainability performance.

About Delek US Holdings, Inc.
Delek US Holdings, Inc. is a diversified downstream energy company with assets in petroleum refining, logistics, pipelines, renewable fuels and convenience store retailing. The refining assets consist primarily of refineries operated in Tyler and Big Spring, Texas, El Dorado, Arkansas and Krotz Springs, Louisiana with a combined nameplate crude throughput capacity of 302,000 barrels per day. Pipeline assets include an ownership interest in the 650-mile Wink to Webster long-haul crude oil pipeline. The convenience store retail segment operates approximately 250 convenience stores in West Texas and New Mexico.
The logistics operations include Delek Logistics Partners, LP (NYSE: DKL). Delek Logistics Partners, LP is a growth-oriented master limited partnership focused on owning and operating midstream energy infrastructure assets. Delek US Holdings, Inc. and its subsidiaries owned approximately 72.6% (including the general partner interest) of Delek Logistics Partners, LP as of June 30, 2024.

FAQ

How many convenience stores is FEMSA acquiring from Delek?

FEMSA is acquiring 249 convenience stores from Delek, primarily located in Texas.

What is the value of FEMSA's acquisition of Delek's retail operations?

FEMSA is acquiring Delek's retail operations for $385 million on a cash-free, debt-free basis, including inventory.

When is the FEMSA-Delek transaction expected to close?

The transaction is expected to close during the second half of 2024, subject to customary regulatory approvals.

What is the size of the US convenience and mobility market that FEMSA is entering?

The US convenience and mobility market has a total addressable market of more than $850 billion, with over 150,000 locations.

How does this acquisition align with FEMSA's (FMX) strategy?

This acquisition aligns with FEMSA's long-held ambition to enter the US convenience and mobility industry, leveraging its retail expertise from OXXO operations.