Israeli oil refining company Delek US Holdings Inc. (NYSE:DK), managed by chairman and CEO Uzi Yamin, seeks to merge with Alon USA Energy Inc. (NYSE:ALJ). Delek US controls a 47.2% stake in Alon USA Energy Inc. (NYSE:ALJ), which it acquired last year from Alon Israel Oil Company Ltd. (Alon Group) for $565 million. On Friday, it sent Alon USA's board of directors, a letter offering to buy the remaining shares at a share exchange, at a market valuation of only $533 million.
Delek US is offering to pay a ratio of 0.44 of its shares for every Alon USA share controlled by the public. Yesterday, Alon USA was traded on the New York Stock Exchange at a share price of $8.43, while Delek US was traded at $17.06. Therefore, this proposal reflects a price of only $7.5 per share, an 11% discount on Alon USA's market cap.
Alon USA is traded at a market cap of $600 million, after having lost half of its value since control was acquired by Delek US (which also lost 55% of its value during the same period, and is currently traded at a market cap of $1.1 billion).
Delek US and Alon USA control and operate refineries, oil pipelines and gas stations throughout the US. Alon USA responded to this proposal by saying that it was transferred to the examination of a special committee of independent directors, which has recently been examining strategic alternatives for the company. The committee, consulted by the JP Morgan Investment Banking Division, intends to negotiate the details of the deal with the Delek US board. Alon USA clarified that any agreement signed between the parties will require the approval of the majority of minority shareholders.
Yamin: both companies are underpriced
Ostensibly, the initial price offered by Yamin is lower than the market cap and is therefore expected to be rejected by the independent committee. However, in the letter he sent to David (Dudi) Wiessman, a representative of the special committee, Yamin stresses that both companies are currently underpriced by the capital market.
Yamin claims that the proposal reflects the valuation ratio between companies, considering their balance and forecasts, in addition to the challenges affecting the entire sector.
"We believe that this integration (between the two companies - O.C.) will create significant value for Alon and Delek shareholders, both in the short and the long term. Completing the deal using only shares will provide Alon shareholders, many of whom already control Delek shares, with the opportunity to fully participate in the value creation which will follow its realization," Yamin wrote.
"Our proposal reflects a convincing opportunity for Alon shareholders and we await your response," Yamin added in his letter to Wiessman, who founded Alon USA during his tenure as Alon Group CEO and, as mentioned, is an active director in the company, as well as the chairman of the general partner in the Alon USA Partners partnership, controlled by Alon USA.
Weissman also personally controls a 4.3% stake in Alon USA, valued at $26 million; therefore, completing a successful merger deal is also important for him. Other Alon USA minority shareholders include Dimensional Fund Advisors (8.5%), Vanguard Group (7.1%), D. E. Shaw & Co (5.4%) and the Point72 Asset Management fund (5.4%). Jeff Morris, vice chairman of the general partner in the Alon USA Partners partnership, controls a 2% stake in the parent company.
Yamin also states in his letter that the proposal, which will bring about the merging of the companies' refining, conveyance and retailing operations supports their shared goal to attain an operational optimization and a stable cash flow growth. He added that Delek US had already pursued several measures to improve its financial condition, mainly selling its retailing operations to the Chilean energy company COPEC for $535 million in cash.
Delek US' retailing operations currently include 348 complexes with gas stations and convenience stores in seven southern states, mainly Tennessee, Alabama and Georgia. These operations, which are expected to be sold by late December, reported $671.4 million revenue in the first half of 2016, leading to a $30.2 million profit to the parent company. For comparison, during the corresponding period last year, retailing revenue totaled $747.9 million and a $26.6 profit.
Published by Globes [online], Israel business news - www.globes-online.com - on October 19, 2016
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