FINDLAY, Ohio -- Marathon Petroleum Corp.’s decision not to spin off its Speedway LLC retail network is the culmination of a more than eight-month strategic-review process that the company called “rigorous and independent.”
Enon, Ohio-based Speedway has a 2,730-unit convenience-store network that spans 21 states. It ranked No. 3 in CSP's 2017 Top 202 list of the largest c-store chains in the United States.
Keeping Speedway as an integrated business within Marathon Petroleum “drives the greatest long-term value for MPC shareholders,” MPC’s board said.
The reasons it cited for the decision include the loss of integration synergies, limited-value fuel-supply agreements, market volatility and vulnerability and the loss of retail growth opportunities, among other factors.
An activist shareholder called for the review late last year. Here's a look at how the shareholder and the industry is reacting to the decision …
Shareholder sought review
Contending that Marathon Petroleum was “severely undervalued,” shareholder Elliott Management Corp. in November urged MPC to spin off the retail network.
Gary Heminger, MPC chairman and CEO, said at the time that he disagreed with Elliott Management’s conclusions and that the company continued to value an integrated supply chain. MPC convened the independent special committee of the board to conduct the review of Speedway. The committee, which held 11 meetings, included five independent directors of the MPC board and no executive management.
“The committee engaged its own financial and legal advisors in its evaluation of multiple alternatives,” said Heminger, above, “including a potential spinoff, split-off, IPO carve-out, tracking stock, merger, joint venture, REIT (real-estate investment trust) and MLP. Tax advisors were also engaged. … The committee left no stone unturned.”
Elliott, Marathon make peace
"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," John Pike, senior portfolio manager at New York-based Elliott Management, said following MPC’s Sept. 5 decision. "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."
In announcing the decision for Speedway to remain within MPC, Heminger said, "Throughout the execution of our plan to deliver substantial value to MPC shareholders, the board and management team have benefited from our constructive dialogue with, and valuable input from, Elliott and all of our shareholders."
C-store industry watchers were not surprised by the announcement.
“This was a predictable outcome,” Ken Shriber, CEO of Petroleum Equity Group, Chappaqua, N.Y., told CSP Daily News concerning MPC’s decision not to spin off Speedway. “And it is the right decision, but they had to explore all options to respond to shareholder activists.”
He sees refining and marketing synergies as key to the future of the company. “Marathon has not had sufficient time to monetize its acquisition of Hess Retail, and a key driver for that was an additional network for its refining output. The integration of refining and marketing in this case provides the incremental return for Marathon, which supported their 14x multiple of EBITDA (earnings before interest, tax, depreciation and amortization) purchase of Hess.”
And MPC’s decision moves the pieces on the c-store industry mergers-and-acquisitions (M&A) chessboard.
“Speedway's more than 2,770 sites make it the second-largest company-owned and operated c-store chain in the U.S., and we believe Couche-Tard would have been a finalist in any bidding process had there been a sale,” TD Securities Inc. analyst Michael Van Aelst said in a research note. “This announcement removes the largest U.S. company from our list of potential Couche-Tard acquisition targets. With less than 15 chains in the U.S. of over 500 sites, consolidation efforts in the U.S. will likely be focused on strategic tuck-under deals.”
Scale and acquisitions
On the conference call to announce the results of the Speedway review, Heminger said that “the artificial intelligence and intellectual capabilities” of the chain’s computer platforms drive scale. “As we continue to grow sales and merchandise margins inside the store and can maintain or reduce expenses, which we’ve been able to do, that model really helps us and gives us an opportunity to drive some additional scale. “
He defined synergies as “being able to take that scale and that platform we already have and being able to execute and put that same platform” in other markets.
While MCP was “on the sidelines” of the big transactions this year because of this review, “we will continue to look at opportunities in the retail space,” he said. “We have a lot of geography, a lot of opportunity.”
He also referenced the Hess acquisition.
“We’ve already completed all of our reidentification and rebranding at the former eastern locations that we purchased, and we’ve far exceeded the synergy targets there. So now we see opportunities to build out in a number of those markets where we bought those assets; I think we have opportunities there. It’s too early to talk about if there are any acquisition opportunities, but we will certainly look at the opportunities that come along,” he said.
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.