FINDLAY, Ohio -- Keeping Speedway LLC as an integrated business within Marathon Petroleum Corp. (MPC) “drives the greatest long-term value for [Marathon] shareholders,” MPC’s board said in concluding a “rigorous and independent” strategic review of the company’s 2,730-unit convenience-store network that spans 21 states.
Speedway ranked No. 3 in CSP's 2017 Top 202 list of the largest c-store chains in the United States.
The board based its decision on the recommendation of an independent special committee formed to determine the best home for the retail network. The committee’s review “left no stone unturned” in examining “all potential alternatives,” Gary Heminger, MPC chairman and CEO, said during a conference call to announce the decision.
The review looked at the possibility of a tax-free separation of Enon, Ohio-based Speedway and other strategic and financial alternatives. It evaluated multiple Speedway separation alternatives vs. Speedway retention, negotiated a potential fuel-supply agreement between MPC and Speedway and engaged the IRS in a formal private letter ruling (PLR) process including consideration of the fuel-supply agreement.
Heminger laid out the reasons why MPC is keeping Speedway …
Substantial integration synergies would be lost as a result of a spinoff or separation. Following an initial supply agreement, MPC estimates the synergy loss would have been between $270 million and $390 million annually.
“Our analysis indicates any supply agreement structured in pursuit of a tax-free spin would be market-based and arm's length,” said Heminger. “Such a conventional supply agreement would be limited in term and in volume. As a result, the supply agreement only temporarily and partially mitigates the loss of integration synergy, and the synergy value lost beyond the term of an initial supply agreement is substantial. Such a transaction … would destroy significant value.”
2. Debt reduction
A spinoff 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, the company said. This would be a significant use of MPC cash and likely reduce the future return of capital to shareholders and investments in the business.
3. Growth opportunities
“Speedway performance is transparent and easy to understand, and is valued by the market,” Heminger said. “Speedway is a proven, best-in-class convenience-store retailer with strong growth opportunities.”
There are “significant opportunities” to continue enhancing value and aggressive investment in Speedway, he said. “Speedway’s strong growth prospects are not impeded by remaining part of MPC,” said Heminger.
“The bottom line is that there is no compelling evaluation opportunity in separating our retail business, and that any potential separation will cause loss of integration synergies, additional cash needed to maintain appropriate balance sheet strength, increased volatility in the remaining business and we believe result in long-term value destruction,” said Heminger. “Specifically, the board determined that substantial integration synergies would be lost in a spinoff or separation.”
Overall, “the potential advantages of separation are not compelling relative to the disadvantages,” he said.
- Watch CSP Daily News tomorrow for reaction from investors.
Findlay, Ohio-based MPC is the nation's third-largest refiner, with a crude-oil refining capacity of approximately 1.8 million barrels per calendar day in its seven-refinery system. MPC owns, leases or has ownership interests in approximately 10,800 miles of crude and light-product pipelines. MPC also owns the general partner of MPLX LP, which it formed in 2012 to own, operate, develop and acquire midstream energy infrastructure assets.
Marathon-brand gasoline is sold through approximately 5,600 independently owned gas stations and convenience stores across 19 states.