I’m not gonna share every intimate detail about the Blue Diamond deal but, the things I specifically mention as problems or challenges I think I should show you how I go about resolve them. The environmental issue is HUGE. So to help me get my arms around the financing aspects of that issue, I asked my lenders for help. This is the email I sent:
I hope your 2020 has gotten off to a great start. We’re busy here and planning for a great year.
We have made significant progress in planning for the c-stores acquisition we begin discussing last year. Within the last week, we have finally agreed to a price with the seller. We are currently negotiating the details of the LOI and the subsequent PSA. In that regard, I have a couple of questions for you that we may have discussed in passing but now with trying to structure the deal, I do need some insight from you.
I know that at least one of the sites has had a line leak and is currently in need of lines and tank replacements. We will be replacing tanks at several sites including a couple of sites that will be complete raze and rebuilds. We have a verbal commitment from Texaco for a supply contract and it includes the rebuild of some of the stores.
We have due diligence planned that includes environmental site assessments for each site. The initial assessments will determine where we will need to do soil testing and as a result, we will know what remediation plan we will need to undertake on a site by site basis.
My question to you as we work on structuring the LOI and subsequent PSA is, what will be the bank’s approach to dealing with sites where we have to do some remediation? In my previous deal, the seller was Conoco and they provided indemnification as well as a commitment to pay for any remediation. We’re not dealing with Conoco so we have to be careful in how we structure the transaction.
I’m thinking of one of four options in dealing with this seller but I don’t know if either of these will be acceptable to the bank. Here are my thoughts:
- Remove Contaminated Sites from Deal – We will probably include an option to remove a site from the purchase package if the due diligence reveals an unsatisfactory level of contamination. This is not an ideal situation but we will want to limit/manage our exposure. We have a minimum volume requirement for the Chevron/Texaco relationship. Although not all 14 stores will be branded Texaco (for different reasons), we need all the planned Texaco stores in the deal so we don’t have issues with the branding. Insofar as the non-(Texaco) branded stores, we obviously want to keep the incremental revenue, cash flow.
- We could reduce the overall purchase price – we will include an option to reduce the purchase price by the costs of the remediation. I’m sure we will negotiate a floor on the sales price. This is an acceptable option for us and probably doesn’t impact a banking decision.
- Reserve/Set-aside for Remediation – we can negotiate a set-aside with the seller to cover the costs of remediation. Any unused amount would be released to the seller. The actual amount of the set-aside will be based on the assessments. This does have a banking impact as you (may?) would be asked to fund the set-aside, assuming this is a workable solution for you.
- Finance Outside of Primary Acquisition Loan – assuming you guys just have an absolute prohibition against funding any contaminated site, would you issue a commitment subject to the clean-up? I’m thinking we might be able to do a two-step acquisition for some sites. That would give us the ability to complete any remediation then refinance them into the primary acquisition loan with the other “clean” stores. This would not be an ideal situation as this two-step process would add additional costs and time to the transaction.
This could be done in conjunction with a combination of the scenarios above; however, this would not be our preference and we would only want to do this if there is no workable solution inside the primary acquisition loan.
If this is the only viable option for you, let’s discuss the parameters surrounding this two-step process.
A final question.
Environmental Assessments – will you guys accept our reports or, are you required to order your own? We have tentatively identified EMG/Bureau Vista Group as a prospective vender to provide the site assessments. Would they be acceptable to you?
Please give me a call and let’s discuss options. I want to structure a deal that is financeable so I don’t extend the transaction time.
Looking forward to hearing from you.
Let’s see what they say.