Bob Espey, President and Chief Executive Office of Parkland, at the company’s On the Run store in Mississauga, Ont. on Nov 29, 2022.Fred Lum/The Globe and Mail
A U.S. activist hedge fund is pushing for an overhaul of Parkland Corp. PKI-T that would see the company’s refinery and fuel-distribution businesses sold or spun-off to create a “pure play” fuel and convenience-store retailer.
In a letter delivered to Calgary-based Parkland Wednesday morning, New York-based Engine Capital LP said if the company’s board is unwilling to implement its recommendations, it should explore the sale of Parkland to private equity or strategic buyers.
The investment company also called on Parkland to add new directors to “strengthen” the board and to overhaul its executive-compensation structure.
In a statement, Parkland acknowledged that it received the letter and that it has been circulated with the board for “review and consideration.”
“The company appreciates constructive shareholder input and will provide an update in due course,” it said.
Parkland’s share price closed up 9.7 per cent Wednesday to $32.05.
“Parkland in its current form does not work as a standalone public entity,” Engine Capital’s managing partner Arnaud Ajdler wrote in the letter. “The status quo can no longer exist.”
Engine Capital, which has US$750-million in assets under management, said it owns approximately 2 per cent of Parkland’s shares, a position it began to acquire last year.
How fuel giant Parkland is adapting to a low-carbon world
The company’s shares have been under intense pressure since the start of the pandemic as remote work led to fewer commuters on the road. At the same time, the company has faced questions about its fossil fuel exposure amid a global push toward a low-carbon economy.
Compared with Parkland’s stock price peak in January, 2020, the company’s shares have fallen roughly 40 per cent.
In its letter, Engine Capital said Parkland’s shareholder return has significantly underperformed that of both its convenience-store and refinery peers, which the investment company said reflects Parkland’s “conglomerate discount.”
The letter highlighted the “staggering” outperformance of Couche-Tard. That company, based in Laval, Que., has seen its shares climb more than 50 per cent since January, 2020.
Parkland is Canada’s second-largest convenience store and gas-station owner after Couche-Tard ATD-T, operating nearly 2,000 stores in Canada under brands such as On the Run, Ultramar, Pioneer and Chevron, and hundreds more in the U.S. and the Caribbean. It also owns frozen prepared food retailer M&M Food Market, which it acquired in early 2022.
In addition, Parkland owns a vast fuel-production and supply business, including a refinery in Burnaby, B.C., commercial propane distribution and fuel marketing.
Engine Capital called on Parkland to hire an investment bank to unload the refinery and its heating oil and propane-distribution businesses. The investment company proposed splitting Parkland into two public companies, retaining the “higher-growth” retail business for itself and spinning off the “lower-growth” refinery and fuel-supply business.
Engine Capital estimated that based on a valuation multiple of 8.5 times earnings before interest, taxes, depreciation and amortization (EBITDA) for Parkland’s retail business, and five times EBITDA for its refinery and fuel-supply business, the company’s share price would be $45, a 55-per-cent premium.
“If Parkland wants to be valued like a pure-play fuel and convenience retailer, it should simply become a pure-play fuel and convenience retailer,” the letter said.
Engine Capital also questioned whether a number of Parkland’s directors are “capable of acting independently” given their “interrelationships” as directors and executives at other companies and lengthy tenures at Parkland. It noted that two of the four members of Parkland’s strategic initiatives and corporate development committee have been on the board for a combined 41 years, including chairman Jim Pantelidis, who joined the board in 1999.
Engine Capital urged the board to add an unspecified number of new directors.
In a note to clients, RBC Capital Markets analyst Luke Davis said Parkland’s major shareholders are generally aligned with the company’s current strategy and tend to be passive, “though the key concerns outlined have been points of contention for select investors and could gain some traction.”
This isn’t Engine Capital’s first foray into the convenience-store space. In 2016, it pushed for a strategic review at CST Brands Inc., a Texas-based chain, which led it to be acquired by Couche-Tard for US$4.4-billion.
A number of Canadian companies have faced revolts led by activist investors. Last April, Elliott Investment Management revealed it had a 3.4-per-cent stake in Suncor Energy Inc. SU-T, and has been pushing for change at the company. Suncor undertook a strategic review of its Petro-Canada gas-station unit, but ultimately chose not to sell the chain.
However, Elliott is slated to appoint a fourth director to Suncor’s board this month after the energy company failed to meet certain performance criteria laid out in an agreement last year.
Earlier this month, Parkland chief executive Bob Espey said the company would not proceed with a $600-million plan to build a standalone renewable diesel project at its Burnaby refinery, citing the U.S. Inflation Reduction Act and its extensive subsidies for U.S. renewable-diesel producers.
During a call with analysts to report Parkland’s fourth-quarter results, Mr. Espey said the company has “delivered on the commitments that we made to our shareholders,” including meeting its guidance and repurchasing $40-million of shares over the past year.