By the OGJ Online Staff
HOUSTON, May 7 -- Valero Energy Corp. Monday said it plans to acquire Ultramar Diamond Shamrock Corp. for $6 billion, making it one of the nation's largest refiners.
The combined company would have 23,000 employees in the US and Canada and 13 refineries. Valero will also be one of the nation's largest retailers with more than 5,000 retail outlets in the US and Canada. Both companies are based in San Antonio, Tex.
With this acquisition, Valero will have revenues of $32 billion/year and total assets of more than $10 billion. In terms of refining distillation capacity, Valero-UDS would be the third or fourth largest in the US.
John Hohnholt, Valero's senior vice-president for refining operations, said that in terms of total feedstock inputs, the combination of Valero and UDS would create the second largest refiner in the US at 1,865,000 b/d.
He said the companies' straight crude distillation capacity is 1.5 million b/d.
But Hohnholt explained that both refiners have several complex refineries with more conversion than crude capacity, and thus process large volumes of intermediates like residuals and gasoil in addition to crude.
For instance, he said UDS's Wilmington, Calif., refinery has 75,000 b/d of crude capacity but also can run 30-40,000 b/d of intermediate sour gas oils and naphthas.
The transaction is valued at $6 billion, which includes $4 billion in equity and $2 billion in assumed debt. The total consideration to be paid to UDS stockholders equates to a fixed exchange of 1.228 shares of Valero common stock for half of the outstanding shares of UDS common stock and $55/share in cash for the remaining shares of UDS common stock.
Valero said the cash consideration and the stock consideration per UDS share each represent a 30% premium to UDS shareholders based on the 10-day average per share ending Apr. 26. UDS shareholders could elect to receive either cash or Valero common stock for each share of UDS common stock.
Bill Greehey, Valero's chairman and CEO, said, "We're combining the two best independent refining and marketing companies to make the premier refiner and marketer in the US. Obviously this will bring tremendous benefits to both of our organizations and to our shareholders. In fact, in refining and marketing, we will be the only major independent of a size and scope equal to the majors.
"Combining Valero's complex refining system and the extensive UDS refining, logistics and retail network gives us a superior asset portfolio that will allow us to effectively compete in this rapidly consolidating business. We will realize tremendous synergies and strategic benefits while enhancing earnings stability."
Jean Gaulin, UDS chairman and CEO, said, "This really is a winning combination for our stockholders. UDS shareholders will receive a substantial premium, which reflects a more appropriate valuation for the stock and captures value that the market has otherwise been slow to recognize.''
Assets
With the addition of the UDS refining assets, Valero said it would have the most geographic diversity among US refiners.
Like Valero's six refineries, the seven UDS refineries are generally high-conversion facilities that produce cleaner-burning fuels including reformulated gasoline, California Air Resources Board formula gasoline and CARB diesel. Valero will also acquire UDS's 4,600-mile pipeline network, including the Shamrock Logistics MLP and associated assets.
Greehey said, "We will benefit from enhanced financial performance through realization of numerous potential synergies among the facilities, including multi-refinery purchasing and inventory optimization. We estimate that these synergies will have a benefit in excess of $200 million/year.
"The current industry fundamentals and the long-term outlook for our business have never been better. Refined product inventories continue to trend at historically low levels. At the same time, gasoline and distillate demand remain strong. With limited excess refining capacity in the US, there is very little room for inventories to build substantially in the near future. This should continue to keep the supply/demand balance tight and support healthy refining margins going forward."
UDS owns gasoline stations branded Ultramar, Diamond Shamrock, Beacon, and Total at more than 2,500 sites in the West, Southwest, and Mid-Continent, and in Eastern Canada. The company also supplies 2,500 dealer, truck stop, and cardlock sites in the Southwest, Mid-Continent, and Eastern Canada.
In addition, UDS operates one of the largest home heating oil businesses in North America, supplying 250,000 households.
Greehey said, "We're excited to substantially grow our retail presence because retail margins are counter-cyclical to refining margins, so in the event we experience lower refining margins, retail margins will help stabilize our earnings." Greehey will remain Valero chairman and CEO. Four UDS directors will be added to the Valero board, expanding it to 13. Gaulin will work with Greehey on the organization of the new Valero, and then will retire.
The boards of both companies have approved the transaction, which is subject to the approval of stockholders and regulators. The acquisition is expected to close by the end of the year.
Valero has 3,100 employees and had revenues of nearly $15 billion in 2000. It has six refineries in Texas, Louisiana, New Jersey, and California with a combined distillation capacity of 712,000 b/d, according to an Oil & Gas Journal survey. It bulk markets in 34 states and operates 350 retail locations in California.
UDS has more than 20,000 employees and had $17 billion in revenues last year. It operates seven refineries in the US and Canada with total throughput capacity of 750,000 b/d, according to an OGJ survey. It has nearly 5,000 retail gasoline/convenience stores, and petrochemicals and home heating oil businesses.
