Marathon Petroleum has agreed to sell its Speedway petrol stations business to Seven & i Holdings in a $21bn all-cash deal, five months after the Japanese owner of the 7-Eleven convenience store chain halted talks in the midst of the coronavirus crisis.
Having earlier failed to agree on pricing, the Japanese retail giant decided to forge ahead with its largest ever acquisition, to cement its top position in the US convenience store market and capture growth outside a shrinking home market.
Ohio-based Marathon has come under pressure from activist investor Elliott Management, which last year launched a second campaign to push the oil group to address its “chronic underperformance” by breaking up its businesses. Marathon had already announced plans to spin off Speedway into a separate entity.
The US oil group recently resumed its efforts to divest Speedway after exclusive talks with Seven & i to sell the business for about $22bn fell apart in March, according to people close to the talks.
Selling Speedway will leave Marathon far more reliant on refining and midstream operations at a time when oil groups’ refining margins — the profit from processing crude oil into fuels — are being squeezed. Speedway’s retail operations had provided some insulation from pressures in the main oil-processing business.
While demand for fuel has started to recover after the coronavirus pandemic triggered the worst demand crash in decades, few in the industry expect it to reach pre-crisis levels before late 2021.
For Seven & i, the deal extends its US push following the $3.3bn purchase of parts of Sunoco’s convenience store and petrol station business in 2017. The addition of Speedway will expand its market share in the US convenience store market from 5.9 per cent to 8.5 per cent, pushing it further ahead of its closest rival, Canada’s Alimentation Couche-Tard.
“This will allow us to take a historic step towards becoming a global retailer,” Ryuichi Isaka, chief executive of Seven & i, said during a conference call on Monday.
Shares in Seven & i fell as much as 7.8 per cent on Monday in Tokyo due to concerns about the acquisition price, which puts Speedway’s enterprise value at 13.7 times earnings before interest tax, depreciation and amortisation.
In its presentation, Seven & i said it would use a US tax scheme to save $3bn over the next 15 years, and expected synergies of up to $575m within three years. Along with a plan to sell $1bn in assets, the company said the actual acquisition price would be closer to 7 times EV/ebitda.
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Jefferies analyst Michael Allen said Seven & i’s balance sheet was strong enough to finance the deal, adding the pandemic was not creating any new funding challenges. “I think it’s going to give them the opportunity to make more acquisitions in the future. It makes their job a lot easier since they are alone as number one in this market.”
The company plans to use bridge loans and corporate bond issuance to finance the deal with a target to reduce its debt to less than three times its ebitda in two years.
In a statement on Sunday, Marathon’s chief executive officer Michael J Hennigan said: “The establishment of a long-term strategic relationship with 7-Eleven creates opportunities to improve our commercial performance.”
It includes a 15-year fuel supply agreement under which Marathon will supply Speedway with about 7.7bn gallons a year. Marathon, the US’s biggest oil refiner, “expects incremental opportunities over time” to supply more 7-Eleven sites, it said.
The company said the deal would generate about $16.5bn in after-tax proceeds, which will go to repaying debt and returning funds to shareholders.
Michael Llanos, an analyst at S&P Global, said last week that it would not be in Marathon’s interests to sell Speedway because the unit provided about $1.5bn a year in stable earnings that would now be lost. “Speedway complements the overall business,” he said.
EG Group, a Blackburn-based petrol station chain part-owned by TDR Capital that has grown rapidly through acquisitions in recent years, had also expressed interest in the Speedway business, people familiar with the deal said.
Marathon said the deal has been approved by the boards of both companies and is expected to complete in the first quarter of 2021.
Additional reporting by Derek Brower
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