Tesoro to Acquire Western Refining: What’s the Deal?



Tesoro to acquire Western Refining

Tesoro (TSO), an independent American refining company, has agreed to acquire Western Refining (WNR), marking a significant leap in its inorganic growth path. The acquisition is likely to create synergies of ~$350 million–$425 million within two years. WNR’s recently acquired Northern Tier Energy (NTI) will likely add further value to Tesoro’s portfolio.

TSO and WNR each have refining assets, midstream capabilities, and marketing networks, all of which we’ll discuss in the next article. First, let’s have a look at the deal.

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What’s the deal?

WNR shareholders can elect to receive 0.44 of Tesoro stock for every WNR stock, or $37.3 in cash per WNR share, subject to the ceiling of 10% of the equity consideration. TSO’s stock price stood at $85.7 per share, and WNR’s stock price stood at $30.5 per share before the acquisition announcement, representing a WNR-to-TSO stock ratio of 0.36. The offer implies a 22.3% premium to WNR’s stock’s pre-deal price, a favorable scenario for WNR’s shareholders.

The transaction values WNR at $6.4 billion, including its debt and noncontrolling interest in Western Refining Logistics (WNRL). The acquisition process is expected to close in 1H17, subject to the requisite approvals.

Stock reactions: TSO and WNR

On November 17, 2016, WNR opened with a bang. WNR’s stock opened at $37.36, around 22.4% higher than its previous day’s close. This was due to the premium offered to WNR shareholders by Tesoro and the market’s belief that the deal would go through. WNR achieved highs of $38.8 on the day and closed at $37.6, around 23% higher than its previous day’s close.

On November 17, TSO opened at $87.8 per share, higher than its previous day’s close of $85.7 per share. This meant that the market viewed the deal favorably, even from Tesoro’s perspective. The market also likely sees the bidding price as fair for the value being received. Tesoro saw highs of $90.5 and lows of $85.8 during the day and eventually closed at $86.6, around 0.96% higher than its previous day’s close.

On November 17, TSO’s peers Valero Energy (VLO), Phillips 66 (PSX), and Delek US Holdings (DK) rose 1.6%, 1%, and 5%, respectively. However, Marathon Petroleum (MPC) fell 0.3%. For exposure to refining sector stocks, investors can consider the Vanguard Energy ETF (VDE), which has ~8% exposure to the industry.

Move on to the next article to learn about the synergies among TSO’s and WNR’s segments. Later, we’ll look at TSO’s and WNR’s valuations, short interests, and analysts’ ratings.


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