erming out
On February 16, BP plc (BP) announced its intention to acquire TravelCenters of America (FOCUSED TOWARDS) for $86.00/share in cash (an 84% premium to TA’s 30-day VWAP). BP goes spend $1.3 billion to expand its network of roadside fuel distribution, electric vehicle charging stations and convenience stores. The acquisition facilitates BP’s goals of smoothly increasing sales as the world transitions to cleaner energy, but it’s also a big win for TA and its subsidiary, The RMR Group (NASDAQ:CMA).
Since the Inflation Reduction Act (IRA) passed in August 2022, we’ve scoured the markets for companies that could accretively leverage the abundance of energy tax credits. proper to the law. January 30 announcement That TravelCenters of America reached an agreement with Electrify America to install 1,000 EV fast chargers in 200 locations across the country was great news.
We already knew TA and that was a problem; TA is an RMR company. Dane Bowler has long spoken out against the dangers of investing in REITs or other companies advised by The RMR Group, a $37 billion alternative asset manager based in Newton, MA. Shares of RMR affiliates often trade at eye-watering discounts to their demonstrable intrinsic values, but over the past two decades we have seen that RMR’s management decisions have been consistently contrary to shareholder interests.
TA’s bold infrastructure plans to build a nationwide network of 1,000 EV fast chargers were laudable, but were plagued with two problems. First, even if it were a joint venture with the expertise of Electrify America, it would be a huge investment, and we weren’t convinced that TA was capitalized enough to swing it. Second, and this was the killer, we didn’t trust RMR would help them do this. We passed on the shares and only had to wait two weeks to regret it.
BP seizes the opportunity
BP sells gasoline, diesel and, increasingly, electricity for electric vehicles across the country. TravelCenters’ 200 roadside outlets fit seamlessly into BP’s existing portfolio and the acquisition allows BP to seamlessly sell more fuel, coffee, food and amenities across stores and restaurants in YOUR. BP has an A3/A- credit, capital scale and most importantly is not linked to the RMR. It’s a winning move by BP, and I’m long on stocks, but BP isn’t the only winner in this trade.
TA shareholders almost doubled their investment in the wake of the announcement; among the main shareholders was the RMR group.
S&P Capital IQ
The $86/share buyback will yield RMR$53.48 million at closing. This translates to $3.43 per RMR share. Measured against the current RMR stock price of $30, the sum is significant. But there is more.
As an asset manager, RMR is contractually entitled to receive management/advisory fees. Contracts are beyond reproach and often include strict clauses (penalties) in the event of early termination or change of control. In the business management contract described in article 12 of the 10K TAwe can see that the BP transaction should trigger the change of control/termination clause.
FOCUSED TOWARDS
Using the 2021 fee of $14.04 million as a base, we calculate the termination fee would be $40.25 million. This translates into an additional RMR of $2.58/share owing. Combining the termination fee with the redemption proceeds and RMR, you should see $6.01/share at close.
We expect 2022 fees to be 15% to 20% higher than 2021 and termination fees to be between $2.90 and $3.00/share. Again, relative to the current price of RMR stock at $30, $6.00 to $6.40/share is significant, so we are now long on RMR.
Post-trade RMR
Buying $30 worth of stock because you expect a company to turn some of its assets into $6 cash only makes sense if you think what’s left is worth more. So let’s look at what’s left.
On February 2, RMR released its 1Q23 fiscal results. In this report, they divide their asset management business into two categories: Perpetual Capital AUM and Private Capital AUM
CMA
In the Perpetual Capital stack, TravelCenters of America accounted for $1.89 billion in remunerated AUM, or about 8.3% of perpetual AUM.
CMA
If you combine Perpetual AUM with Private Capital AUM, that’s about $26.9 billion in total paid AUM, and AT is about 7% of that total. Thus, the $6 received from the BP transaction represents 20% of the current share price, but only reduces RMR’s remunerated assets under management by 7%. And you still have the $6, but there’s more.
RMR’s largest AUM asset is Service Properties Trust (SVC) which also happens to be an important party to the BP/TA transaction. With an assets under management valuation of $9.09 billion, SVC represents 39.9% of RMR’s perpetual capital assets under management. SVC owns 189 TA properties which will now be operated by BP. BP has just signed a new 10-year lease for these properties and will pay annual rents to SVC that will average annually about $20.5 million more than what TA has paid. BP will be SVC’s largest tenant (representing over 29% of gross assets) and has an investment grade credit rating. These terms translate to significantly higher revenue for SVC, which in turn translates to higher revenue for RMR.
In summary
The acquisition of BP is a valuable tool in its ambitious plans to transition to the green energy economy. TA shareholders will realize the full value of their impressive company. RMR left no money on the table by monetizing a small asset while building the value of its larger asset.
We need to see more win-win-win deals like this.