FINDLAY, Ohio — Marathon Petroleum Corp. (MPC) and Andeavor are eyeing substantial synergies once the tie-up between the two energy companies is completed later this year.
"Each company will bring its best qualities to the strategic combination and together we'll create truly something special — a premier energy company," Andeavor Chairman and CEO Greg Goff said during a joint conference call on April 30. "We are confident in our ability to drive substantial growth, deliver long-term value for our shareholders, and achieve on our synergy targets."
MPC and Andeavor on Monday entered into a definitive merger agreement under which MPC will acquire all of Andeavor's outstanding shares, representing a total equity value of $23.3 billion and a total enterprise value of $35.6 billion. MPC and Andeavor shareholders will own approximately 66 percent and 34 percent of the combined company, respectively.
The boards of directors for both companies unanimously approved the transaction, which is expected to close in the second half of the year, subject to regulatory and other customary closing conditions. MPC and Andeavor shareholders still need to approve the deal.
According to Goff, the newly combined company is confident it can achieve at least $1 billion in annual run-rate cost and operating synergies within the first three years.
"We have spent considerable time and effort identifying these synergies and have clear paths forward to achieve these synergies," he said.
As MPC Chairman and CEO Gary R. Heminger detailed during the April 30 call, the $1 billion in synergies include:
- Approximately $225 million in annual run-rate synergies from cost efficiencies;
- Approximately $150 million in procurement efficiencies, resulting from a 1-percent to 2-percent improvement in combined annual purchasing spend of more than $10 billion;
- Approximately $210 million in synergies across Andeavor's retail network of approximately 1,100 company-owned or -controlled stores, in line with the synergies Marathon realized with its acquisition of the Hess Corp. retail network in 2014;
- Approximately $165 million from integrated systems optimization; and
- Approximately $220 million from optimizing the combined refinery operations.
"I think the synergies are underpinned by the strong capability of both companies to go in and make things happen in the business," Goff said. "And the things we have identified are not, in my opinion, a stretch. They are things that fundamentally drive improvement in the base business, whether it be in the retail marketing business or in the things we can do to strengthen our refining operations."
Marathon & Andeavor Expected Synergies
- $225 million in annual run-rate synergies from cost efficiencies
- $150 million in procurement efficiencies
- $210 million in synergies across Andeavor's retail network
- $165 million from integrated systems optimization
- $220 million from optimizing the combined refinery operations
Under the terms of the merger agreement, Heminger will remain chairman and CEO of the newly combined company, while Goff will join MPC as executive vice chairman. Goff, along with three other Andeavor directors, will also join the board of directors of Marathon Petroleum.
In addition, the two companies have named three executives to lead the integration efforts. Don Templin, currently president of MPC, with the assistance of Lisa Wilson, who works in investor relations, will lead from the MPC side. Mike Morrison, senior vice president of marketing at Andeavor, will lead from the Andeavor side.
A new management team structure could be in place by the third quarter, according to Heminger.
"We are going to be very methodical about how we do this, and Greg and I have spent a lot of time discussing how we are going to do this," he explained, adding that a number of other executives will be named to work with Templin, Morrison and Wilson.
"We are going to be quick to make those decisions because we have one chance to make this right. You can always modify down the road, but we're going to get this right and we are going to spend a lot of time really working on the structure, with Greg and I overseeing the structure before we make our final decisions," Heminger said.
Right Deal at the Right Time
Why this merger now? It's the right time, agreed the chief executives.
"Look at the map of the two companies and the way they are positioned geographically in the United States and you come to the conclusion that this is a great opportunity to be able to bring the companies together," Goff explained.
"Over time, there has been conversations about the value to be able to combine the two companies. I look at it and say, Why wouldn't you vs. why do it. Why wouldn’t you do this deal? I don’t come up with any reasons, to be quite honest with you," he said.
"The time is right now because, for this industry, the wind is behind our backs and having that momentum is just an excellent time to capture every single benefit we've identified in this and the opportunities as we move forward," Goff said, calling the newly combined company "an incredibly powerful combination."
According to Heminger, he and Goff spent a lot of time talking about the pending deal, with the majority of the talk centered on delivering synergies.
"This was not just a knee-jerk reaction and let's go put these companies together. The industrial logic, the business logic is so sound," Heminger said. "We have the highest say-do ratio on Wall Street. If we say we are going to do something, we do it. That's why are going to underpromise and overperform.
"I think the synergies are much greater. What we put in the deck are what we are absolutely confident we are going to achieve in short order. Now is the time in being able to accomplish that," Heminger said.