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'Specified Consent' needed in Flying J/Pilot merger

One of the key components needed to complete the $4.5 billion merger between Flying J and Pilot is the “Specified Consent” from both ConocoPhillips and Shell Oil regarding the ownership and operation of jointly owned truck stops.  These consents need to be obtained by Oct. 31 in order to extend the Exclusivity Period where Flying J agrees not to enter into discussions with other acquirers.

The relationship with ConocoPhillips and Shell also showcases another significant difference in the operating styles of Flying J and Pilot.

 Flying J is a full-service operation catering to smaller fleets and owner-operators while Pilot’s focus is on larger, high volume fleets. Flying J also has a higher level of integration, controlling the companies that provide fuel cards and financial, insurance, and other services to its customers.

Pilot, which operates and licenses more than 300 locations in 40 states, is owned by the Haslam Family (52.5 percent) and CVC Capital Partners, a large international investment company. Flying J, on the other hand, is controlled by the Call Family and Flying J employees, but has partners in subsidiary companies, such as ConocoPhillips, in over 100 locations in the USA and Shell in over 60 locations in Canada.  This difference in corporate structures helps accounts for the big difference in the respective “Enterprise Values” of Pilot ($3.3 billion) and Flying J ($1.2 billion).

 It is common practice for partners to have “Change of Control” provisions in their Stockholder Agreements. After all, you want to know who partner is.  Attila the Hun or a rival truck stop operator are not acceptable partners. While Pilot is obviously a well respected, successful company, the provisions in the “Change of Control” clauses may provide the opportunity for the oil company to change the terms of the operating agreement or even force the sale of its ownership interest.

For example, ConocoPhillips, the third largest U.S. oil company, has announced that it is going to sell approximately $10 billion of assets over the next two years.  Does ConocoPhillips want to sell its 50 percent interest in CFJ Properties?  Or does Shell want an expanded agreement for Pilot to sell its branded products?  Or do they want to exchange their partnership interests for Pilot stock?  Or are both parties content with their existing agreements?

 The corporate structure of Flying J makes the financing of this transaction more complicated.  Overall, the new operation will have a “guesstimated” $2.5 billion of debt, including the $300 to $500 million needed to pay off Flying J’s creditors, existing Flying J debt, including property specific debt, and Pilot’s existing debt.  Since a large portion of Flying J’s operations are in these two subsidiaries, lenders to the new company will not have direct access to the cash flow and assets of the subsidiaries, making the financing more difficult and more expensive, possibly requiring an equity infusion or mezzanine financing.

The target date to obtain the Specified Consents is Oct. 31, at which time the Exclusivity Period will be extended to March 31, 2010, the “Drop Dead Date.”

As of Sept. 30, the Transaction Documents were not completed.  This includes the Stockholders Agreement which delineates the economic and voting relationship between the three owners, the Haslam Family (42 percent), CVC (38 percent) and Flying J (20 percent).  However, Pilot was granted an extension of the Exclusivity Period “based on the notion that finalizing the documents is going well and will be completed with in the next few weeks.”

Once the Transaction Documents are completed and the Specified Consents obtained, the two major hurdles are antitrust approval and arranging the necessary financing.  And once the transaction is closed, then the real work begins: servicing our readers, America’s long-haul truck drivers.

Jack Humphreville can be contacted to comment on this article at [email protected] . He is also affiliated with Recycler Classifieds (recycler.com ).

The Trucker staff can be contacted to comment on this article at [email protected] .

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