Delek US Mulls Refinery, Retail Buy

Analysts dissect possible deal as company explores purchase of refinery, up to 450 stations

Greg Lindenberg, Editor, CSP

BRENTWOOD, Tenn. -- Analysts are beginning to weigh in on Delek US Holdings Inc.'s potential $1 billion acquisition of certain unnamed U.S. petroleum refining, retail and wholesale marketing assets, which it announced in a Securities & Exchange Commission (SEC) filing on Friday. As reported in a CSP Daily News Flash, the assets include a petroleum refinery with a capacity between 75,000 and 100,000 barrels per day that produces mainly light products, a refined products terminal, fuel transportation trucks and the acquisition of, or entry into wholesale supply agreements with, between 400 [image-nocss] to 450 retail outlets.

The completion of the transaction would be subject to, among other things, the completion of the due diligence investigations; Delek US obtaining sufficient financing to complete the transaction; the parties reaching an agreement regarding all material terms and conditions of the transaction including, without limitation, the assets acquired and the price, terms of payment of consideration and the parties receiving all third-party permits and approvals necessary to complete the transaction.

Delek US is negotiating transaction terms and conducting due diligence investigations within the context of an exclusive negotiation period that expires at the end of July2008. As part of the negotiations, at Delek US's request, its parent, Tel Aviv, Israel-based Delek Group Ltd., has provided Delek US with a nonbinding letter of intent expressing Delek Group 's willingness to provide Delek US with financial support up to $200million, in a form acceptable to Delek Group, in the event that the transaction is completed.

The company, which declined further comment, did not specify which refinery it is considering; however, the asset in described in the SEC filing matches the profile of two Oklahoma refineries that are currently on the block, according to a Dow Jones report. Valero Energy Corp. and Sunoco Inc. have both entertained offers on their refineries in that state, it said. While industry watchers saw Delek as a top contender for another Valero refinery, in Memphis, Tenn., that plant is larger than the window Delek outlines in its disclosure, the report said.

"We are not saying anything officially about which companies have expressed an interest in our assets," said Bill Day, a spokesperson for San Antonio, Texas-based Valero told the news agency. Sunoco was not available for comment.

"Delek US has evaluated other large deals in the recent past, none of which ever came to fruition; however, we believe there is reasonable potential that a transaction could be completed," Mark Miller, an analyst with William Blair & Co., Chicago, said a research note provided to CSP Daily News. "Management describes the [current] negotiations as 'extremely premature,' and the company disclosed this development because a subsidiary of its parent company, Delek Group Ltd. in Israel, is raising money for its own purposes; however, Delek US does have an exclusive opportunity to bid on the assets until the end of July, at which point the company will sign a deal, extend the exclusivity period, or walk away."

He added, "If Delek can close the acquisition, we believe it would be positive for three reasons: 1.) it would add scale so that Delek would no longer be a single-refinery operator, and it may give the company some vertical integration with the convenience stores; 2.) the timing appears favorable given that refining multiples are currently at low levels (recall that Delek had been outbid on other deals when refinery prices were much higher); and 3.) Delek has a solid balance sheet so the transaction could be significantly accretive for equity shareholders."

If Delek does buy a refinery, the move would be "daring," said Dow Jones. Since January, U.S. refining margins have been depressed by high oil prices and weakening gasoline demand. The weakness has caused the refiners' share prices to tumble in recent weeks, and analysts forecast many losses across the sector this quarter. Still, Delek has said that it has been seeking to acquire a second refinery since it first went public, said the report. While other small refiners like Alon USA and Western Refining Inc. have closed deals, Delek has not, leaving it without some of the economies of scale of its peers.

"Historically, Delek has created a significant amount of value by acquiring energy assets at depressed prices, and we continue to believe the company is a solid operator as well," Miller said. And in a recent meeting with stock analysts at the William Blair & Co. Growth Stock Conference in New York, company president and CEO Uzi Yemin boasted about Delek US 's strong balance sheet and noted that the current slow economy is exactly the kind of atmosphere in which he likes to invest in acquisitions. “We don 't want to pay seven and eight times multiples. We want to pay four and five times,” he said. “We don 't want to pay the highest multiples on the highest EBITDA ever. We want an average EBITDA. And that 's how we made our money.”

By buying when the economy is slow, Yemin finds the company is better suited to benefit when the economy picks up. “In 2001 and 2002 [when we first entered the industry], those weren 't good years, but we made our money in 2006 and 2007,” he said. “The amazing years that we had, we had them based on the acquisitions that we did in 2001 through 2005. That 's happening again right now, and the fact that we have such a healthy balance sheet…allows us to continue to consolidate some of the stores.”

The pending purchases outlined in last week 's SEC filing also fall in line with Yemin 's vision for the company. “We want 60% refining and 40% nonrefining,” he said.

Click herefor previous CSP Daily News coverage of the William Blair & Co, conference.

Brentwood, Tenn.-based Delek US is a diversified energy business focused on petroleum refining, marketing and supply of refined products and retail marketing of fuel and general merchandise. The refining segment operates a high conversion, independent refinery, with a design crude distillation capacity of 60,000 barrels per day, in Tyler, Texas. The marketing and supply segment markets refined products through its terminals in Abilene, Texas, and San Angelo, Texas, as well as other third-party terminals. The retail segment markets gasoline, diesel and other refined petroleum products and convenience merchandise through a network of 497 company-operated retail fuel and convenience stores located in Alabama, Arkansas, Georgia, Kentucky, Louisiana, Mississippi, Tennessee and Virginia, operated under the MAPCO Express, MAPCO Mart, East Coast, Discount Food Mart, Fast Food and Fuel and Favorite Markets brand names.