2013 alone witnessed both Valero’s (VLO) CST spinoff (since acquired) and Murphy Oil’s (MUR) spinoff of Murphy USA (MUSA).
Earlier this week, the company announced that the review has completed and that the Board has unanimously decided to retain Speedway.
Gary R. Heminger, MPC chairman and chief executive officer, said: “Our board has a well-established track record of taking bold and transformative actions to drive value and will continue to do so when it’s in the best interests of shareholders. Following a rigorous review led by an independent committee of the Board, the Board has unanimously concluded that shareholder value is best optimized with Speedway remaining part of our integrated business. We thank the independent committee for its efforts in performing a comprehensive review of options to ensure we are best positioned to deliver the greatest possible long-term value for our shareholders.”
Notably, the company highlighted that Elliott supports the move, though even in this statement, Elliott still suggests that a spin off would be a good idea, and that it may be necessary in the future to unlock value. Still, this is a rare about-face for Elliott
“Over the past year, MPC has taken significant steps to create value for shareholders. Elliott is supportive of those steps and appreciates the constructive dialogue with the company,” said John Pike, senior portfolio manager at Elliott Management. “We are encouraged by management’s efforts to date, applaud the intent to repurchase an additional $1 billion in shares by the end of the year, and look forward to the completion of the further midstream transactions in the first quarter of 2018. While we see value in a spin of Speedway, today’s decision to maintain an integrated Speedway came after a full, rigorous and independent review. We are also confident in the company’s commitment to take further action as needed to realize the upside in the company’s value.
Marathon detailed the reasons it chose to keep Speedway rather than to pursue a spin off.
Key factors in the MPC Board’s decision to maintain Speedway as an integrated business within MPC include the following:
· Substantial integration synergies would be lost as a result of a spin-off or separation. Following an initial supply agreement, MPC estimates the synergy loss at between approximately $270 million and $390 million annually. Any supply agreement structured in pursuit of a tax-free separation would be market-based. Such a conventional, arm’s length supply agreement would be limited in term and volume, providing only a temporary offset to the lost synergies.
· A spin-off or separation of Speedway would require at least $2.5 billion of incremental debt reduction at MPC and an additional $1 billion of cash on hand at MPC in order to manage pro forma leverage targets and maintain MPC’s current investment grade credit profile. This would be a significant use of MPC cash and likely reduce the future return of capital to shareholders and investments in the business.
· Speedway is a proven, best-in-class convenience store retailer and its value appears to be well understood by the market. The potential advantages of separation are not compelling relative to the disadvantages, nor does Speedway remaining part of MPC present a structural impediment to its long-term growth prospects.
· There is strong value in cash flow diversification, particularly in the energy sector. A separation would leave the remaining business significantly more volatile and vulnerable to sector downturns.
Marathon released a presentation detailing its process which contains significantly more detail. It would appear that the company made significant moves towards a spinoff before deciding not to proceed, including requesting a private letter ruling from the IRS confirming the tax free status of a spin. While we would not be surprised to see this resurface down the road, for now, it looks like there are compelling reasons for Speedway to remain part of Marathon.
Disclosure The Author holds no position in any stock mentioned
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