Western Refining ( WNR) is branching out. The company will soon operate four refineries -- up from one right now -- following a planned $1.22 billion buyout of Giant Industries ( GI). It will expand into new businesses, picking up 159 gas stations, as part of the deal as well. Western has agreed to pay $83 in cash for each share of Giant, representing a 16% premium over Giant's most recent closing price. Western will also assume $275 million of Giant's outstanding debt. The combined company is set to emerge as the fourth-largest independent refiner and marketer in the country. "The acquisition is a plus for Western," says Harry Chernoff, a principal at Pathfinder Capital Advisors who owns the stock. "Refining and marketing assets are undervalued in the market, and Western is picking up quality assets at a reasonable price. ... As long as the refining sector stays strong, Western will do extremely well." Notably, Chernoff points out, Western has predicted that the transaction will be "immediately and significantly accretive" to the company's earnings and free cash flow. Western was already posting above-average cash flow before the deal was announced, he says -- meaning shareholders should now enjoy even bigger returns. Western's stock slipped 11 cents to $25.87 on Monday, while Giant surged $10 to $81.79 on the news.
Now, Western's margins could get even better. Following its acquisition of Giant and some upgrades at its current refinery, the company should be able to use sour crude for nearly half of its refining activities.