Elliott's Singer Launches Breakup Campaign at Marathon Petroleum

Fresh off an activist success at LifeLock (LOCK) , insurgent manager Elliott Management LLC's Paul Singer on Monday launched a campaign urging Marathon Petroleum (MPC) to take a look at splitting itself up into three businesses. 

Shares of the Findlay, Ohio-based petroleum company shot upwards on the announcement of the campaign, trading up over 5% to $45.73 a share early Monday. The activist fund reported owning a 4.1% common equity stake at the same time that it issued a 50-page presentation offering a raft of suggestions for the $23 billion in market capitalization energy company. One main recommendation is for Marathon Petroleum to consider a full strategic review over whether a tax-free separation of the company into three businesses would best serve shareholders over the long-term.

"The valuation uplift from such an action is compelling... peer valuations show that such an action would result in an 80 (plus)% increase to Marathon's stock price," Elliott Management portfolio manager Quentin Koffey said in the letter.

And Elliott Management would likely get some serious support from other activists invested in the stock. According to FactSet, insurgents Jana Partners LLC's Barry Rosenstein and Corvex Management LP's Keith Meister each own small stakes in Marathon Petroleum.

In the letter, Koffey suggests that Marathon could create three separate businesses from its refining operations, midstream crude oil transportation business and its Speedway gasoline and convenience store operations. He also questioned whether Marathon should consider just spinning off the Speedway gasoline and convenience store businesses as an alternative.

In addition, Elliott Management urged Marathon Petroleum to expedite efforts the company launched in late October to drop its midstream business into its master limited partnership, MPLX LP (MPLX) , also known as Marathon Petroleum Logistics, over three years.

MPLX's share price didn't respond positively to the announcement last month. A person familiar with the situation argued that shareholders were concerned about the timing of the move and price of the transaction. He noted that MPLX's share price spiked upwards by about 4% to $34.22 a share early Monday on the news of Elliott's campaign, suggesting that shareholders are enthusiastic about the insurgent fund's efforts to expedite the transaction because it provides clarity for investors. In addition, he noted that the insurgent fund was very actively engaged with Marathon Petroleum about strategic options in the period immediately before its October decision to shift assets to its MPLX master limited partnership.

The activist also said it spent substantial resources evaluating the company's rationale for keeping the units together but the fund said it found them insufficient. The person familiar with the situation noted that Elliott believes that the three businesses that would be created by a breakup would each be large enough on their own for analysts and other observers to easily value them as freestanding companies based on each unit's EBITDA.

For example, Elliott contends that Marathon Petroleum's Speedway LLC would be the second-largest publicly-traded gasoline and convenience store operator, after Alimentation Couche-Tard and ahead of Casey's General Store (CASY) and Murphy USA  (MUSA) . Speedway has about 2,770 convenience stores in 22 states.

However, activist investors targeting energy businesses in recent years have been stung heavily by commodity price drops. Billionaire activist Carl Icahn cut his losses in his large energy investments in 2016—he slashed his position in Transocean Ltd (RIG) to "recognize a capital loss for tax planning purposes" and liquidated his stake in Chesapeake Energy (CHK) as its share price, hindered by a challenging macro-environment for oil and gas companies, moved on a downward trajectory.

Nevertheless, the person familiar with the situation argued that observers shouldn't compare Marathon Petroleum to oil and gas exploration companies like Chesapeake because they are in different businesses. He added that the Speedway business isn't susceptible to commodity price volatility and the company's refinery business represents only a small segment of the overall operation.

The campaign comes after TheStreet in August suggested that an activist could launch a campaign at Marathon to drive shareholder value after Corvex and Jana Partners reported owning stakes in the company. 

It's very possible that Elliott could launch a dissident director election proxy contest at Marathon if the company doesn't follow its plan. The New York-based activist fund has often launched director-elections to drive its share-price improving and M&A agenda and it has launched over 96 campaigns at 92 companies since 1994, including 13 proxy fights, according to Factset.

If Elliott Management's decides to launch a proxy contest at the company's 2017 annual meeting it would need to submit its director candidates by Dec. 15, according to a securities filing. That doesn't give Marathon Partners a lot of time to consider the fund's proposal.

Under pressure from Elliott, LifeLock on Monday agreed to sell itself to Symantec (SYMC) in a $2.3 billion deal. 

This isn't the first time that Marathon has come under pressure from an activist investor. Jana Partners in 2012 said in a securities filing that it was in discussions with the company's management about issues relating to "business strategy, corporate and asset structure." A person familiar with the situation noted that its efforts helped drive Marathon into forming its master limited partnership, MPLX, later that year. 

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