Wellspring's convenient connection

What does growth in the oil and gas industry have to do with creating an attractive investment opportunity from a chain of convenience stores?

The connection might not seem obvious – but US mid-market firm Wellspring Capital Management managed to find it, and profited handsomely as a result.

Back in October 2008, Wellspring, which was founded in 1995 by the late Martin Davis, the former head of (the now rebranded) conglomerate Gulf & Western, bought a chain of convenience stores in West Texas called Town & Country.

The firm paid $361 million in cash with Bank of America, Merrill Lynch, Wachovia and BMO Securities arranging financing.
It was an interesting time to buy a retail business. Lehman Brothers had filed for Chapter 11 bankruptcy protection only one month later, sending markets all over the world into a tailspin. The US was about to experience a painful recession.

However, Wellspring already owned a business called Stripes Holdings, which it had bought from its third fund in 2005. Stripes (which was previously known as Susser but rebranded after an IPO in 2006) owns and operates a chain of convenience stores in the US Southwest, including in Texas, New Mexico and Oklahoma.

Wellspring’s plan was always to take Stripes public and then pursue an acquisition strategy for growth. The firm made its initial investment in Susser in 2005, taking control of about 63 percent of the company; it then took it public a year later, at which point the firm’s stake dropped below 50 percent.

By adding Town & Country to this platform, Wellspring was able to greatly expand Stripes’ store estate and geographical footprint. But perhaps the biggest opportunity Wellspring saw was Town & Country’s location: it had stores throughout West Texas, New Mexico and Oklahoma, an area that was experiencing an economic boom because of the growth of the US oil and gas industry.

Stripes’ convenience store format was also an ideal fit for the many towns in the region that were too small to support big chains like Wal-Mart, according to William Dawson, a managing partner at Wellspring.

All in all, Town & Country was a “transformative acquisition” for Stripes, Dawson says.

Wellspring has been exiting its investment in the Stripes platform gradually. It took some money off the table with the IPO in 2006. Its stake was then further diluted – to around 30 percent – when Stripes issued new stock last December. The firm sold another chunk of its shares in July and distributed the remainder to LPs last month.

All told, the firm generated a 2.5x return from its investment in Stripes.
This helped drive a roughly 27 percent net internal rate of return on Wellspring’s third fund, which raised $640 million in 2002.

The Stripes investment was right in Wellspring’s sweet spot. The firm, which closed its most recent Fund V in 2010 on $1.2 billion, targets the US mid-market, and specifically the consumer products, manufacturing, retail, distribution and business and consumer services sectors.

Wellspring looks for businesses that are “being under-managed, where there is something we can do with the business different from the way they are being operated today”, he says. Putting Stripes and Town & Country together certainly achieved that.