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Valero sets $4B purchase
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May 7, 2001: 10:35 a.m. ET
Utramar Diamond Shamrock deal to form No. 2 U.S. refiner, add retail presence
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NEW YORK (CNNfn) - Valero Energy Corp. said Monday it agreed to buy Ultramar Diamond Shamrock Corp. for $4 billion in cash and stock in a deal that will create the second-largest U.S. oil refiner.
Valero (VLO: down $1.96 to $43.51, Research, Estimates) said it also will assume about $2 billion in debt. Its shares fell in early trading Monday, while shares of UDS (UDS: up $8.04 to $50.75, Research, Estimates) gained more than 20 percent, although that is less than the roughly 30 percent premium for its shareholders.
Valero will pay stock for half the shares and cash for the other half. The stock will be exchanged at a ratio of 1.228 shares of Valero for each UDS share, while those opting for cash will receive $55 a share. That provides a premium of 31 percent for those receiving stock and 29 percent for those receiving cash, based on Friday's closing prices of the two stocks.
The acquisition will create a company with annual sales of $32 billion and total assets of more than $10 billion, along with refining capacity second only to Exxon Mobil Corp., the company said.
The deal should add immediately to earnings per share and produce annual cost savings of $200 million through increased efficiency, the companies said. They did not detail how many positions will be eliminated.
Valero CEO Bill Greehey told CNNfn's Before Hours that while some employees will be offered voluntary early retirement packages, no layoffs are anticipated. He said that both companies have unfilled positions right now, and they're looking to grow operations and production after the deal, not cut them.
"All the benefits of this merger are based on business synergism and not on cutting people," he said.
UDS has seven refineries with a combined daily capacity of 850,000 barrels of oil, as well as a 4,600-mile proprietary pipeline network and a growing home heating oil business, serving 250,000 homes.
Even with the higher price of gasoline, margins for refining are not good enough to justify building new refineries, Greehey told Before Hours. But he said the company has been able to make improvements to five recently acquired refineries that added a total of 185,000 barrels of daily production, or about the equivalent of a new refinery's output.
Greehey said that with U.S. refinery output close to the industry's capacity, even a new flow of oil would do little to increase the supply of gasoline or lower prices.
But he and Jean Gaulin, CEO of UDS, said they are confident that the combined companies can increase capacity of their combined operations to help the combined company grow from the current revenue and production levels they operate separately.
Gaulin, who will retire when the deal closes, said the combined company should be able to attract the investor support necessary to help it grow. Greehey said that the company will be more focused on refinery output than the integrated oil companies.
"What's happening with the majors, they're not spending the money on (refinery) infrastructure, they're spending their money on exploration," he said. "It's the independents that are really working on increasing the supplies." (240KB WAV) (240KB AIFF)
UDS also has about 5,000 branded retail gasoline/convenience merchandise stores, the majority of which use the Diamond Shamrock, Ultramar, Beacon or Total brand names. About half those locations are company-owned, and are concentrated in the Southwest and Midwest as well as eastern Canada.
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"We're excited to substantially grow our retail presence because retail margins are counter-cyclical to refining margins, so in the event we experience lower refining margins, retail margins will help stabilize our earnings," said Greehey, who will be both chairman and CEO of the combined company.
Last month, UDS raised $110 million through an initial public offering for a 24 percent stake in Shamrock Logistics (UDL: Research, Estimates), a limited partnership formed to own and operate the crude oil and refined product pipeline. Valero will acquire the majority stake in Shamrock Logistics, while the shares sold last month will remain public.
The deal still requires approval of regulators and shareholders. The companies hope to close the purchase by the end of October, Greehey told CNNfn. 
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