UDS to sell San Francisco refinery to facilitate merger with Valero

Valero Energy Corp. said the US Federal Trade Commission staff has approved a deal that would allow it to acquire Ultramar Diamond Shamrock Corp. effective Dec. 31. But UDS would have to sell a refinery in the San Francisco Bay area and some northern California marketing assets.

By the OGJ Online Staff

HOUSTON, Dec. 3 -- Valero Energy Corp. said Monday the US Federal Trade Commission staff has approved a proposed consent decree that would allow it to acquire Ultramar Diamond Shamrock Corp. effective Dec. 31.

As part of the deal, UDS would sell its 168,000-b/d Golden Eagle refinery in the San Francisco Bay area and some northern California marketing assets, together valued at more than $1 billion.

Valero said, "Regulators wanted to assure the viability of the refinery with a dedicated outlet for the refinery's gasoline production, so the proposed consent decree requires the sale of 70 associated Beacon and Ultramar-branded retail sites throughout northern California. These assets will be placed in a 'hold-separate' arrangement pending their divestiture."

The FTC commissioners still must approve the agreement. Stockholders of the companies, both based in San Antonio, have approved it (OGJ Online, Sept. 27, 2001).

UDS operates a 78,000 b/d-refinery at Wilmington, Calif., and Valero has a 135,000-b/d plant at Benicia.

Bill Greehey, Valero chairman and CEO, said, "Valero continues to believe that the combined three-refinery system in California would have been in the best interest of consumers and employees and negotiated very diligently with the FTC staff and state regulatory officials to find a way to keep all of the California assets. Ultimately, however, the FTC staff was bound by precedent to apply the Herfindahl-Hirschman Index, a formula the FTC uses to assess market concentration.

"While we are disappointed to be losing the Golden Eagle refinery and retail sites, both Valero and UDS believe that this agreement is in the best interests of our shareholders and the new Valero. As we've previously stated, we expect the merger to be very accretive to our earnings, cash flows, and returns. Because we intend to use the proceeds from the divestiture to pay down debt and buy back our stock, the impact to our earnings from the required divestiture is expected to be minimal."

Geehey said Valero expects synergies from the merger will exceed the original target of $200 million.

The consent decree gives Valero a year to sell the refinery and related retail assets. Valero expects a sale by the end of the second quarter.

UDS bought the refinery a year ago from Tosco Corp. for $950 million, including the cost of inventories and a $150-million earnout payment. It said its capital improvements will total $180 million by yearend. Net book value of the retail network is $35 million.

Noting that the UDS acquisition is being funded half in debt and half in stock, Valero said it would use half of the anticipated divestiture proceeds to aggressively buy back stock to maintain the 50:50 split of equity and debt originally anticipated in the merger agreement.

After the merger, Valero will one of the three largest US refiners with 12 plants and capacity of nearly 2 million b/d. It will operate more than 5,000 retail outlets in the US and Canada.

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