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Hess Sells Gas Stations to Marathon for $2.9B

NEW YORK ( The Deal) -- Activist embattled oil and gas company Hess (HES - Get Report) said Thursday, May 22, it agreed to sell its gas stations to Speedway LLC, a unit of Marathon Petroleum  (MPC - Get Report), for about $2.87 billion.

The price includes $2.37 billion in cash, an estimated $230 million in working capital and $274 million in capital leases.

Speedway president Tony Kenney claimed the deal will make it the largest company owned-and-operated convenience store chain in the U.S. based on revenue and the second largest by store count. Hess Retail is the largest along the East Coast with 1,342 locations and the fifth largest in the U.S. by company-operated sites with 1,256 stores in 16 states. Speedway is the fourth-largest by company owned-and-operated sites with 1,480 stores in nine states.

Based on 2013 data, the combined company would have sales of $27 billion, 6.2 billion gallons of annual fuel sales and $4.8 billion of annual merchandise sales at 2,700 retail locations.

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New York City-based Hess said it will use the proceeds for additional share repurchases, which have been boosted to $6.5 billion from $4 billion. Since the beginning of the program in August 2013, the company has repurchased $2.8 billion in stock.

Hess CEO John Hess said in a statement that the sale marks the culmination of its strategic transformation into a pure-play exploration and production company.

Hess expects to complete the sale by year-end. Marathon Petroleum thinks it will close late in the third quarter if it clears regulators and will pay for it with debt and available cash.

"This acquisition will be transformative for MPC [Marathon Petroleum] and Speedway as it will significantly expand our retail presence from nine to 23 states through these premier Hess locations throughout the East Coast and Southeast," Marathon Petroleum president and CEO Gary Heminger said in a statement, adding that it provided an outlet for 200,000 barrels per day from the company's refining system.

Analysts at Tudor, Pickering, Holt & Co. Securities Inc. said Hess' net proceedss - without the working capital and capital leases - are $760 million higher than what they had baked into the company's net asset value. They added that the unit's $201 million in Ebitda implies a multiple of 13.1 times, higher than the 8 times average for publicly traded gas station companies but slightly lower than the 13.7 times multiple for Energy Transfer Partners LP's recent purchase of Susser Holdings Corp.

They added that the purchase will allow Marathon Petroleum to accelerate expansion at Speedway, which has a goal of $150 million Ebitda growth by 2016 to $1 billion.

Simmons & Co. International said the price came in $1 billion above what it was carrying in its valuation for the company and implies an enterprise value to Ebitda multiple of 11 to 13 times, well above where Hess trades (4.6 times). Simmons doesn't know what the deal's tax leakage will be, but Hess had said that it was important in their analysis of whether to sell or spin off the unit.

Hess previously filed a Form 10 with the Securities and Exchange Commission for a tax-free spin-off of the retail unit.

In addition to retail, Findlay, Ohio-based Marathon Petroleum also is acquiring transport assets and shipping rights on pipes such as the Colonial, which includes 40,000 barrels per day.

Hess has been selling assets to appease activist investor Paul Singer's Elliott Management Corp., which wanted it to sell noncore assets to focus on its highest potential plays.

Hess also hopes to monetize its infrastructure assets in the Bakken Shale next year as a master limited partnership and sell its 50% stake in its money losing energy trading joint venture Hetco with former Goldman Sachs & Co. commodity executives Stephen Hendel and Stephen Semlitz, who each own 25%.

Last month Hess sold oil and gas interests in Thailand to PTT Exploration and Production Public Co. Ltd. for $1 billion, its last exploration and production property divestiture.

Global Hunter Securities Inc. analyst Sameer Uplenchwar said last month that likely buyers for Hess' gas stations would include Marathon, which has shown interest, and master limited partnerships like Energy Transfer Partners, although buyers would have a high valuation threshold considering tax leakage and high peer multiples.

Goldman Sachs Group Inc.'s Bob Higgins and Michael Sachs advised Hess while Kirkland & Ellis LLP counseled it, including Mark Director, Jeffrey Symons, Claire Sheng, Brendan Reed and Eric Sibbern.

Barclays assisted Marathon, including Barbara Byrne, Gary Posternack, Jeremy Michael, Andrew Steinau, Michael Cormier and George Erikson. Jones Day provided legal counsel to Marathon with a team that included Jeff Schlegel, David Stringer, Peter Love, Michelle Brown, Todd Wallace, Traci Lovitt, Nancy Mackimm, Bruce McDonald, Scott Fletcher, Tom Howley, Scott Cowan, Omar Samji, Charmaine Slack, Candace Ridgeway, Andrew Sherman, Martha Wach, Richard Campbell, Paul Green, A. Erin Marino, Robert Cardone and Shaleen Brundsale. Bruce Lazar and Michael Barnett were inside counsel at Marathon Petroleum who worked on the deal and David Ball was inside counsel at Speedway.

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