Western Refining (NYSE:WNR) recently announced that it was spending $775 million to acquire the general partner of Northern Tier Energy (UNKNOWN:NTI.DL). This deal gives Western a share of a refinery located near the Bakken, a hot spot of the domestic oil boom, and doubles the company's convenience store network. For Northern Tier unit holders, this also opens up the door for a complete takeover by Western.
Looking at the two businesses, it's easy to see why Western made this swoop. Western currently has two refineries located close to the Gulf Coast – a region that accounts for about half of U.S. refining capacity. Meanwhile, Northern's refinery is located in the midwest, giving the company access to cheap Canadian oil sands and Bakken crude.
In addition, and this is where I believe the real synergies will come across, Western owns and operates 200 convenience stores within Arizona, Colorado, New Mexico, and Texas; Northern operates 163 convenience stores and supports 73 franchised convenience stores, primarily in Minnesota and Wisconsin. So overall, the combined entity has three refineries and a total of 436 convenience stores across six states.
Indeed, Western's website lays out the synergies gained from the deal:
"As a result of the acquisition, Western's platform will include:
- Refining capacity of 242,500 barrels per day
- Pipeline access to cost-advantaged crude oil sources in the Bakken, Permian, San Juan, and Western Canada regions
- Wholesale distribution of approximately 160,000 barrels per day to customers in the Southwest, mid-Atlantic, and upper Midwest
- Integrated network of 458 retail convenience stores
- Extensive crude oil and refined product logistics assets"
So overall, this deal will provide extensive synergies for Western. With less than a 40% share, however, should we now consider a complete buyout, or is this asking too much?
As I have mentioned, this deal opens up the possibility that Western will move to acquire the whole issued share capital of Northern. I estimated that to do this, Western would need to raise around $1.5 billion based on the number of units the company does not already hold.
The question is, can Western afford this? The current deal will be funded with a $550 million senior secured Term Loan B facility; the remainder was funded with $245 million in cash. Unfortunately, based on these and fiscal third-quarter balance sheet figures, this additional debt and reduction in cash will push Western's debt-to-equity ratio to more than 100%.
The fact of the matter here is that Western is unlikely to try to acquire all outstanding units of Northern; it's just too expensive.
With the current low interest rate environment and numerous single refinery companies spread around the U.S., is this transaction a precursor to a wave of consolidation about to sweep the industry?
It would certainly make sense, and Alon USA Energy (NYSE:ALJ) would make the perfect target. Alon owns the general partner and 81.6% of Alon USA Partners.
In addition, the company is the largest 7-Eleven licensee in the U.S. with 298 retail gasoline/convenience stores in Central and West Texas. So the company could present an attractive target.
Indeed, with a market capitalization of $835 million for Alon USA Partners and $785 million for Alon USA Energy, the two would be a tidy acquisition considering Northern Tier is currently worth around $2.4 billion. Furthermore, Alon Energy reported a loss last quarter, which has depressed its valuation even further. Opportunistic predators could take advantage of this and the synergies that would flow from the deal afterwards.
All in all, Western's acquisition of Northern is strategic and beneficial for the company. However, Northern's unitholders should not get their hopes up for a complete takeover. With a market capitalization of $2.5 billion, the debt required to finance the deal between the two parties would likely cripple Western, not something any company's management would want to be responsible for.
However, this deal could be a precursor for further deals within the sector, and Alon looks like the perfect candidate.