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Icahn $2.6 Billion CVR Takeover Effort Cracks Up

NEW YORK ( TheStreet) -- After losing a string of 2011 takeover battles, legendary activist Carl Icahn is losing by another method, snatching defeat from the jaws of victory in his bid for refiner CVR Energy (CVI - Get Report). But there's a catch.

After winning a rare takeover battle and stemming a series of losing tender offers, Icahn has thrown in the towel on a $30 per share tender offer for CVR, which he won in April.

In a regulatory filing with the Securities and Exchange Commission, Icahn stated that he is withdrawing the tender offer because of abrupt change to the refining markets that are key to CVR Energy's earnings.

"A number of market conditions have changed, including a significant widening of crack spreads," said Icahn in the filing, explaining the rationale for his retreat the CVR Energy tender. "We no longer think that the proposed transaction is feasible at this time and we hereby withdraw it," Icahn added in the filing.

Icahn had planned to take the company private, but not at a price per share any higher than $30. Now it is unclear if Icahn wants to let his CVR stake -- 82% of the company's outstanding shares -- continue to ride a recent rally in the refining market, or if the activist has other plans.

Icahn had won a multi-month takeover battle with CVR Energy's management after a majority of the company's investors tendered their shares to his hostile bid in April.

For Icahn, the CVR Energy bid -- worth roughly $2.6 billion -- was his first successful activist campaign in some time after failing to win tenders for cleaning products giant Clorox (CLX) in late 2011, and a bid for Commercial Metals (CMC) this year. The February bid for CVR Energy showed Icahn dusting off the M&A playbook he used when making his $12.6 billion bid for Clorox.

After taking a 14.5% stake in CVR Energy, Icahn looked to use a larger controlling stake of the refining and nitrogen fertilizer company to drum up bidding interest from a competitor, mirroring an unsuccessful tender offer for the cleaning products giant, which ended last September without shareholder support or competing bids.

However, Icahn only partially succeeded by winning the CVR Energy tender in April. While the company went to his hands, he promised shareholders that he could find a long-term buyer quickly.

Icahn's made the case that he can find strategic acquirers in previous hostile tenders and CVR was a rare win with shareholders supporting the notion. But there was a catch -- as management argued. Icahn's offer of a contingent value right expires nine months from a successful tender, meaning that shareholders were, at least in part, relying on Icahn to find a buyer quickly.

In his bid, Icahn offered a "contingent value right" that would give shareholders a cash payment to a possible higher priced takeover bid in coming months. Still, Icahn expected that CVR was better off in the hands of others than within his investing conglomerate called Icahn Enterprises.

Icahn pointed to Western Refining (WNR - Get Report), HollyFrontier (HFC - Get Report), Valero (VLO - Get Report), Marathon Petroleum (MPC) and ConocoPhillips (COP) as potential acquirers at a higher than $30 price.

In late July, Icahn said he was unable to draw a credible takeover bid for the company after contacting 30 potential buyers through investment bank Jefferies. "CVR received one indication of interest, which CVR and Jefferies did not believe to be credible," said Icahn in a July 26 statement.

The refining business can be highly volatile, with a narrowing or widening in the crack spread -- the differential between the price of crude oil and the refined products -- leading to major swings in stock values across the sector due to the crack spread's impact on refiner profitability. The Nymex WTI Cushing crack spread has risen from a November 2011 low of 13 to more than 32 today, according to Bloomberg data.

Shares of Western Refining are up more than 100% this year, while HollyFrontier and Tesoro (TSO) have risen more than 70% year-to-date. A number of big deals in the refining space have also been struck in 2012, with private equity giant Carlyle Group buying into a Sunoco refinery on the East Coast, and BP announcing the sale of its California refinery to Tesoro -- a refiner it had been trying to sell for years.

Now it's unclear whether shareholders who participated in the tender will benefit from the sector's recent rise.

"We agree with the Board that the company's potential long-term value exceeds $30 per share. That is one of the reasons we are buying it. However, we also believe that if the company cannot be sold in the next two months there are major risks to earnings in the short and intermediate term," said Icahn in a letter to CVR's board, when waging his hostile campaign.

As with Clorox, Icahn played both bidder and M&A banker by recommending a few companies that could be acquirers of CVR Energy at a higher price than his $30 a share offer. However, confirming analyst and management expectations, no bids appear to have emerged.

While CVR Energy management agreed to let his offer stand, they did so extremely reluctantly, removing a poison pill they enacted to prevent Icahn's accumulation of shares, but maintaining that the bid was undervalued.

"The Board is not recommending that stockholders tender into Mr. Icahn's offer and continues to believe CVR Energy's potential long-term value exceeds $30 per share. But the Board also understands, based on the results of Mr. Icahn's tender offer on April 2, that many of the Company's stockholders may prefer to realize value in the near term and would consider the offer," said CVR Energy in an April statement.

CVR Energy owns refineries in Kansas and Oklahoma that can process a combined 185,000 barrels a day. In February, the company announced a special dividend, to be financed in part by selling a part of CVR Partners, a subsidiary of the refining specialist that produces nitrogen fertilizer. Prior to tendering an offer for CVR Energy, Icahn had urged the board to focus on an outright sale.

For more on Carl Icahn, see his investment portfolio.

-- Written by Antoine Gara in New York

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