Seven & I Holdings (TYO: 3382) took a bold move on Sunday by agreeing to buy out Speedway gas stations (NYSE: MPC). Despite the dollar tag, investors wonder whether buying up gas stations when the demand for oil is low was smart. Ultimately causing some apprehension as to whether investors should back Seven & I holdings. Thus, today’s article will provide our viewers with a simple overview of the buyout, the possible future for the gas station industry, and whether YIG sees value in an investment.
Table of contents 1. Breakdown of the acquisition 2. Is the gas station industry bullish or bearish? 3. Does YIG see value in a Seven & I holdings investment?
Why did Seven & I Holdings agree to buyout Speedway gas stations?
Seven and I holdings will acquire Marathon Petroleum’s Speedway gas stations with cash and debt. However, what more interesting is why did Marathon Petroleum agree to sell Speedway gas stations. Basically, the company wanted to shift its focus from retail to making fuel. Because Marathon Petroleum, like other energy companies, see the retail industry forming a recessionary trend amidst the pandemic.
Based on Marathon’s rationale, you might be thinking why on Earth did Seven I Holdings agree to buyout Speedway gas stations? To put it simply, Japan’s petrol convenience store market is saturated. Seven & I holdings needed to expand their U.S. footprint to stay in the retail gas game longer. Therefore, Seven & I holdings understand that Speedway stations will suffer in the short-term but should aid improvements in revenue over the long-term.
Is the Gasoline industry Bullish or Bearish?
The swift transition to electric cars, ghost-like aeroplane trips, and stay at home economy suggests that the demand for oil is sinking. While we should see a pick-up in the demand that is only because the current price levels are attracting buyers. However, ESG investing, a digital economy, and the ability to charge your cars at home should be the guillotine to the gasoline industry. The International Energy Agency affirms this claim as they expect gasoline demand to peak late in this decade but then follow a bearish path.
Does YIG see value in a Seven & I Holdings Investment
Before I begin, I am obliged to remind our viewers that this is not financial advice but rather investment commentary from extensive research
Short answer: Investing when the economy begins to recover holds the most value (opinion not advice)
The bigger the company, the better
In times when the world is upside down being a bigger company often serves a massive advantage. Especially in the areas of government funding, bankruptcy, and the ability to survive longer than competitors. The Speedway acquisition will significantly increase the size of Seven & I holdings. At face value, investors might think the increased market share is excellent. Because more customers mean more revenue, and when the retail gasoline industry recovers, increased market share should be advantageous.
However, YIG would like to point out that Seven & I are putting a lot of their profitability eggs in the retail gasoline industry. An industry that is bearish in the long-term. Thus, the increase in retail petrol stations exposes Seven & I to more risk to a long-term decrease in revenue and profitability.
Investing inline with oil demand
While investors are gloomy about the long-term outlook on oil, the next few years could provide Seven & I investors with an opportunity. Eventually, the world will attempt to get back to pre-COVID life, which should see the retail gasoline industry temporarily recover. Also, Electric Vehicles are still yet to make deiseal cars obsolete. Thus, for a short period of time Seven & I holdings should see an uptick in revenue and possibly profitability. Ultimately restoring confidence and providing investors the opportunity to ride the hype around earnings reports. However, in the long-term the deal should be a fatal blow to the businesses revenue.
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The information above is not financial advice. Youth Investment Group has no liability for personal financial interests or investment decisions. You should make your own investment decisions based upon your own research and what you believe is best for you.
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Written by Patrick McLoughlin, Senior Manager of YIG.