Mergers & Acquisitions

Delek U.S. Defends Retail Strategy

Open letter to stockholders addresses CVR Energy’s push for it to sell its c-stores, other business shifts
Photograph courtesy of Delek US

BRENTWOOD, Tenn. — The tension between refiner-marketer Delek U.S. Holdings Inc. and its shareholder CVR Energy Inc. over suggested changes in strategy—including divesting its convenience stores—continues to escalate ahead of Delek U.S.’s 2021 stockholders meeting. The board of directors of Delek U.S. has issued an open letter to its shareholders in response to public statements made by CVR Energy, which it describes as a “competitor.”

CVR Energy, New York, controlled by entrepreneur Carl Icahn, has suggested that Delek U.S.’s stock is undervalued and that it could benefit from selling the retail network, among other measures. CVR has nominated three independent directors to the Delek U.S. board and continues to push its agenda.

About a year ago, CVR Energy took an approximately 15% ownership position in Delek U.S. “at severely depressed prices,” the letter said, and that Delek U.S. was “a potential consolidation target.”

While at first CVR Energy thought Delek U.S. might be a good acquisition, it has said it now “has no interest” in acquiring the company because of changes in the industry. CVR Energy now believes Delek U.S. can achieve greater results for its shareholders by devoting capital to other investments.

“We find it odd that CVR is urging Delek to adopt a business strategy closer to its own, given CVR’s track record of substantial underperformance relative to Delek,” the letter said.

“While CVR is calling for the divestiture of our retail segment, its management has publicly stated repeatedly, over a long period of time and as recently as January 2021, its aspirations to have its own retail business,” Delek U.S. said in its letter, citing statements by CVR Energy CEO David Lamp investor presentations and earnings calls.

“The contradictory position that Delek should sell its retail business while CVR is expressing interest in building such a business suggests CVR may be motivated by short-term monetary gain rather than a desire to create long-term value for Delek shareholders,” said the letter.

Delek U.S. defended its commitment to retail. The company “has a track record of prudent strategic actions in this area of our business. Delek developed the MAPCO Express convenience store chain into a strong southeastern U.S. business, and sold the business in 2016 at a multiple of approximately 12.7 times forecasted store-level EBITDA. The proceeds from that sale were a key component in developing adequate liquidity to proceed with the acquisition of Alon. Since the MAPCO Express sale, market multiples for retail have remained strong, and we believe this trend will continue for some time.”

The letter continued, “We inherited Alon’s retail chain as a result of the 2017 Alon acquisition. Since then, through the rationalization of the store portfolio and the implementation of our proven retail programs, the adjusted retail contribution margin has doubled from approximately $29 million in 2016 (pre-Alon acquisition) to $47 million in 2020. In addition to implementing our programs and divesting or not renewing leases of approximately 50 locations (which generated approximately $20 million in cash proceeds), we have constructed three new-to-industry (NTI) stores which outperform our legacy stores in terms of expected adjusted retail contribution margin by 4.8x. Through further build-out of NTI stores, we have the potential (capital dependent) to achieve more than $100 million in adjusted retail contribution margin by 2025 as the NTI stores mature. We forecast an [internal rate of return] above 25% on retail growth capital expenditures, representing one of the more attractive opportunities to which we can allocate capital.”

It added, “the retail segment provides a natural fuel short for Delek’s refining segment and enhances cash flow stability. We continue to evaluate holding versus selling with the assistance of outside advisors, but we believe there are additional growth opportunities for the retail segment."

The board’s letter concluded, “Delek has a reputation for engaging with shareholders and analysts with respect to value-creating ideas and constructive proposals. While we welcome feedback from all shareholders, we respectfully note that CVR is not like any other Delek shareholder. We believe the actions demanded by CVR, a direct competitor of Delek, could benefit CVR’s competing business rather than creating value for Delek’s shareholders. Delek’s board carefully evaluated CVR’s nominees and unanimously determined that adding them to the Delek board is not in the best interests of Delek shareholders."

"Our board will continue to evaluate actions in the best interest of all Delek shareholders—not just CVR. We believe we have the right strategy in place to enhance shareholder value—the continued execution of our long-term strategic plan that is underpinned by a rigorous and disciplined capital allocation framework. We are also confident that we have the right team in place to deliver on this plan,” it said.

Click here to view the full text of Delek U.S.’s open letter to stockholders.

Brentwood, Tenn.-based Delek U.S. is a diversified downstream energy company with assets in petroleum refining, logistics, asphalt, renewable fuels and convenience-store retailing. The refining assets consist of refineries operated in Tyler and Big Spring, Texas, El Dorado, Ark., and Krotz Springs, La. The c-store business operates more than 250 locations in central and west Texas and New Mexico. Delek U.S. is the largest 7-Eleven licensee in the United States, although the companies have agreed to exit the licensing agreement.The retail c-store business has launched a new c-store brand, DK, and will rebrand all of the 7-Eleven stores by the end of 2021.

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