The merger proposal on Crown Central Petroleum Corp.'s plate might not be a magic bullet, but at least it's something. And at this point, industry experts say, almost any move the company makes will be an improvement.
The Baltimore-based oil refiner has been hemorrhaging cash seemingly forever. Over the past decade it lost money every year but three. Its Class B shares have declined from more than $36 in 1989 to close at $6.875 on Friday, and Class A shares went from more than $40 a decade ago to $7.875, frustrating shareholders and causing one fund manager to refer to company officials as the "Keystone Cops."
"Most analysts, if they even bother to take a look at it, would say the time is at hand for Crown Central to really become part of a larger entity," said Alvin D. Silber, an oil analyst for Herzog Heine Geduld in New York. "They cannot remain independent."
Crown, in effect, acknowledged that it was in trouble in February when it hired Credit Suisse First Boston to evaluate "strategic alternatives." It is not known when Credit Suisse will make its recommendations.
Analysts say Crown must consider the full spectrum of options, from acquiring another refiner to selling its two Texas refineries, its retail operation of 331 gas stations and convenience stores or the entire company.
Officials at Crown, which employs 180 at its headquarters and an additional 2,700 nationwide, declined to discuss what is under consideration, saying it is still waiting for Credit Suisse's report.
It might be forced to confront one proposal -- whether to accept a takeover effort by privately held Apex Oil Co. in St. Louis.
In a letter to Crown's board of directors that was filed with the Securities and Exchange Commission, Paul A. Novelly, who with his Apex partners holds nearly 15 percent of Crown's Class A voting shares, proposed earlier this month that the companies combine. He said he would run it for three years, ousting Henry A. Rosenberg Jr., Crown's chairman, chief executive and president, who has run the company for 33 years.
Crown executives would not comment on the offer, other than to say it will be considered. Rosenberg declined to be interviewed.
Little is known about Apex, which fervently guards its privacy, including its assets and how it might complement Crown. Analysts are hard-pressed to say whether the proposal makes sense. But they do say Crown can't continue on its current path.
Hard to sell
Some of the factors that have contributed to the refiner's poor performance are likely to make selling its assets difficult.
Crown has two refineries, both in Texas: One in Tyler with a capacity of 52,000 barrels per day, and one in Pasadena, just outside Houston, that can process 100,000 barrels per day. The Tyler operation is considered minuscule compared to other facilities. The Pasadena refinery is in the middle of a hotbed of competition.
Within about an hour's drive there are at least six other refineries that can process a total of nearly 1.5 million barrels of oil per day, said Crown's executive vice president in charge of refining operations, Randy Trembly.
"There's an oversupply," he said. "People have to mark [gasoline] down to sell it."
Neither Crown facility is capable of refining heavy, "sour" crude oil, which generally comes from Mexico or Venezuela. Heavy crude is relatively cheap, but the finished gasoline product sells for the same price as gasoline from more expensive, lighter "sweet" crude. Crown is able to process only sweet crude.
The cost to upgrade the Pasadena plant to allow it to process sour crude would be several hundred million dollars -- a price so high the investment wouldn't pay off.
"It's more attractive to be a large refiner who can not only take advantage of economies of scale, but who have the complexity to utilize lower-cost raw materials," said Jon Kyle Cartwright, senior fixed-income analyst at Raymond James.
Cartwright said Crown might be able to "muddle along" for a while longer, but that ultimately fundamental changes in the company will be necessary.
"Their options are very narrow," he said. "I would have sold a while ago."
He said Crown probably couldn't afford to simply close either of its refineries because the cost of environmental cleanup would be prohibitive. For that reason, many old refineries are converted into terminals -- basically holding tanks -- but there is no great demand for them right now.
At this point, Cartwright said, Crown might not even be able to give away its refineries.
"I believe that a majority of larger, independent refineries in the U.S. have looked at making a zero bid for Crown's refineries to see if it's economically feasible to turn them into terminals," Cartwright said. "As far as I know, nobody has made a bid."
Cartwright doesn't blame 70-year-old Rosenberg, who took over the company's presidency in 1966, for Crown's poor performance, saying some market conditions were beyond his control.
Some others are not as forgiving.
"I think the company suffers from benign neglect. If this were a true public company, Henry Rosenberg would have been fired so long ago it would not be an issue," said Marc Perkins, who was chairman of the Florida-based investment firm Perkins Capital Advisers before he closed it last year.
Perkins believes the Rosenberg family, which controls nearly half of the company's Class A shares, treats Crown more as a private company than one with shareholders.
"All you've got to do is look at the results of the company," he said. "Nobody [else] could wake up every day and not be totally embarrassed by this company, but [Rosenberg] acts like he's done just fine."
Perkins believes the company should be sold. "Don't merge it -- sell it," he said. "Unless it's stock from a good company, OK. But other than that, he should sell it and go away."
Geoff Rosenberger, a fund manager at Clover Capital Management, said he dumped the firm's 200,000 shares in Crown years ago.
"All you have to do is look at their track record to see what frustrated me," he said. "Basically I just couldn't take it anymore -- these guys were the Keystone Cops."
He said that the family's huge stake in the company has affected performance and made its leaders complacent. While he acknowledged that it's hard for a small company to operate in an industry dominated by giants, he said: "Given that reality, they should have read the writing on the wall and gotten bigger or gotten out. If they didn't have a viable business plan, then they should have sold the assets to somebody who had economies of scale. That's Business School 101."
Company blames market
Trembly, who has worked at Crown for 16 years, said management isn't to blame. Unlike integrated companies such as Exxon Corp. that do everything from drilling to processing to retail, Crown is at the mercy of the difference in price between what it pays for crude vs. gasoline's wholesale price.
"When margins are bad, it hurts everybody," he said. "I don't think if you go through the other refineries' numbers you will see them having a good year and Crown a bad year. We all roll with the margins."
Crown reported a loss of $6 million in the third quarter that ended Sept. 30, blaming high crude prices for the negative earnings. During the same period, Clark USA Inc. saw its profit decline 93 percent to $6.8 million and Sunoco Inc.'s profit fell 82.5 percent to $14 million.
Valero Energy Group, however, enjoyed a 425 percent jump in profits, to $22.6 million.
Trembly also pointed to studies by Solomon Associates Inc. in Dallas that measure refiners' efficiency. In 1992, Crown's Pasadena refinery ranked 62nd out of 88 U.S. refineries in terms of operating expenses. But four years later it had risen to 44th out of 89.
"I think our cost per barrel is not that high," Trembly said.
But regardless of who or what led to Crown's financial free fall, all parties agree it is time for action.
"Logic would require looking at options and possibly doing something very different than they are now doing," said Silber, the analyst at Herzog Heine Geduld.
"There's a real possibility there will be major changes at Crown Central before too long."