Industry observers have marveled at the price that Marathon Petroleum Corp.(MPC)/Speedway LLC is paying for Hess Corp.’s more than 1,300-unit, mostly company-operated retail store chain. We also learned that the Hess brand, which has existed for more than 50 years, will be replaced within three years with the Speedway brand.
The first Hess station opened in 1960 in Oakhurst, N.J., at a time when leaded gasoline was selling for about 30 cents per gallon. The company grew into a formidable regional competitor with a recognizable brand name, enhanced by the millions of holiday season toy trucks it has sold since 1964. With the disappearance of Hess from retail, a piece of Americana will be lost.
It was no real surprise when Hess announced its intentions to shed itself of its retail business. Its sites along the East Coast had become surrounded by independent fuel jobbers and operators that purchased assets from ExxonMobil, BP and Shell. As such, Hess sites, with a mostly company-operated model burdened with increasing site-level expenses and overhead, would eventually become less profitable, and therefore less competitive. Although Hess continued to drive volume with some of the lowest posted street prices, it decided to focus on more profitable upstream businesses, as many large integrated oil companies have done.
This represented a significant restructuring, and one may reasonably argue that it was prompted by the proxy fight from Elliott Management Corp., which claimed that the value of Hess assets was not fairly reflected in its stock price. Elliott proposed that the Hess board take immediate steps to unlock asset value through spinoffs or sales, thereby maximizing shareholder value.
Hess subsequently sold 18 terminals to Buckeye Partners LP. It then sold its energy businesses to Direct Energy in November 2013 for $1 billion. Then Hess filed with the SEC to spin off its retail network into a separate, stand-alone fuels marketing company (Hess Retail Corp.), just as Phillips, Marathon and Valero had done with their downstream assets. During this period, Hess Corp.’s share price jumped from a low of $65 to about $100 at press time.
While Hess engaged Goldman Sachs to handle the spinoff process and underwrite its IPO, it was rumored that it was also soliciting bids for Hess retail in its entirety. I believed the most likely scenario was a spinoff. It seemed the best way to deliver value to existing shareholders was to distribute to them shares in the new company.
‘An Excellent Fit’
As we now know, Hess accepted an eye-popping, head-shaking, jaw-dropping $2.87 billion offer from MPC. That’s more than $2 million per site at a time when average East Coast market prices for similar fee-owned assets range from $1 million to $1.5 million, or 6x to 8x EBITDA. Highly profitable outliers will fetch more than $2 million. In contrast, sites with ground leases sell for far less, and we have heard that Hess has many leased locations, making the purchase price even more remarkable. MPC paid a multiple estimated at 12x to 14x. MPC CEO Gary Heminger at the time said “the acquisition will be transformative, an excellent fit.” I agree with him for the following reasons:
▶ The acquisition gives MPC immediate access to Northeast and Mid-Atlantic markets with high barriers to entry.
▶ Speedway does not currently operate in these markets, so there is no overlap.
▶ Many Hess markets have strong, consistent historical margins, which I believe to be sustainable.
▶ The acquisition provides an accretive aspect in that it adds an important, sizable final link to MPC’s logistics network of refineries, pipelines and terminals.
▶ Hess sites have superb “dirt” strength, with above-average customer counts, facilities and visibility.
▶ It presents additional earnings opportunities through wet-barrel trading and the addition of terminal partners.
▶ OPEX and overhead efficiencies will eventually be recognized.
It will be some time before we witness how MPC’s strategy unfolds. In the interim, it will spend millions in closing and transitional costs, as well as about $50 million or more on reimaging. Add to that possibly $100 million in marketing and advertising to introduce a new-to-market Speedway brand, and the total acquisition package cost is about $3 billion. And that, my friends, makes this Hess M&A transaction king of the hill.
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