Merged Flying J, Pilot entity to offer over 600 locations in U.S., Canada

Pilot will have a 20 percent market share of the on-road diesel market. (The Trucker file photo)

By JACK HUMPHREVILLE
The Trucker News Services

12/14/2009

What will the new company look like when Pilot and Flying J merge? This assumes no divestitures or other major concessions as a result of any antitrust settlement.

The new merged entity will have about 600 locations, of which about 500 will be operated by the company and 318 will be owned by the company.

Pilot will have a 20 percent market share of the on-road diesel market.

For 2009, pro forma revenues are projected to be about $20 billion, down considerably from 2008 because of lower fuel prices (off by 45-50 percent) and 10 percent fewer gallons sold.

The 2009 pro forma operating profits (earnings before depreciation, interest, and taxes) are projected to be more than $700 million. This implies that margins per gallon improved slightly.

Of course, one question is how pro forma operating profits are calculated, especially as it relates to overheads, assumed savings, pricing power, and whether Pilot purchased the 50 percent interest in the ConocoPhillips joint venture that operates over 100 Flying J locations.

Debt is projected to be around $2.4 billion, or about 3.4 times operating profits, implying an equity value in excess of $2 billion.

The corporation has a junk bond rating of BB.

However, the financing is rated BBB-, an investment grade rating, most likely because of the security backing the financing.

Issues of concern are the high level of debt, the outlook for the trucking industry, the volatility of fuel prices, and the integration of the two companies’ operations and different cultures.

The opportunity is the successful integration of the two companies and maintaining the low-cost operating structure.

The new merged entity will have increased pricing and purchasing power.

If the new entity is able to increase its fuel margins by a penny and increase its non fuel margins by 1 or 2 percent, operating profits will increase by more than $100 million, an increase of about 15 percent.

In this transaction, the equity ownership of the Haslam family (52.5 percent) and CVC Capital Partners (47.5 percent), an international investment firm, will be diluted by an estimated 20 percent and by another 7 percent if the Flying J shareholders exercise their option to purchase $200 million of new equity.

However, this may be a high grade problem in that the Haslams’ smaller percentage will be worth considerably more because of the lower overheads per gallon, greater operating efficiencies, the increase in pricing and purchasing power, and the improved market share.

Jack Humphreville can be contacted to comment on this article at news@thetrucker.com. He is also affiliated with Recycler Classifieds (www.recycler.com).