Valero agrees to buy Ultramar


SAN ANTONIO - Valero Energy Corp. agreed yesterday to buy Ultramar Diamond Shamrock Corp. for $6 billion in cash, stock and assumed debt, creating the second-largest U.S. oil refiner behind Exxon Mobil Corp.

Ultramar holders will get $55 in cash or 1.23 shares of Valero stock for each share held. That's 29 percent more than Ultramar's closing price Friday. Valero will pay about half in cash and half in stock. It will assume about $2 billion in debt.

Valero's chief executive, William Greehey, said limited U.S. capacity for refining oil into gasoline and other fuels, combined with high demand, are boosting profit margins after years of low earnings. Oil prices have fallen 14 percent in the past six months, while tight supplies have pushed gasoline prices to record highs.

"Margins are normally $4 or $5 a barrel," said Allen Ashcroft, a portfolio manager with Allied Investment Advisors, a fund that owns shares of refiners such as Exxon Mobil. "They're now double or triple that."

The merger, which will give Valero 5,000 gas stations and retail outlets for its fuel, comes as the American Automobile Association said U.S. gasoline prices climbed to a record $1.679 a gallon Friday and may stay high into the summer amid tight supply.

Retail prices have topped $2 a gallon at some filling stations, with three weeks left before the traditional start of the peak-driving season.

"There have been a number of consolidation plays over the last few years [among refiners], and without exception we've been told that those consolidations ... will ultimately result in lower prices for the consumer," AAA spokesman Geoff Sundstrom said. "Well, we have evidence today that these consolidations have done absolutely nothing for motorists."

The Ultramar agreement comes three months after Phillips Petroleum Co. agreed to buy Tosco Corp., the largest independent U.S. refiner. Sunoco Inc., Tesoro Petroleum Corp. and Premcor USA Inc. are among the few remaining independent U.S. refiners that haven't merged.

Antitrust regulators may not be willing to let Valero and Ultramar combine, especially after a Phillips-Tosco merger, Ashcroft said.

"I know Tosco and Phillips looks like it's going to fly, but I can't see the Justice Department" allowing Valero and Ultramar to merge, Ashcroft said.

With Ultramar, Valero will have 1.85 million barrels a day of refining capacity, slightly more than the total refining capacity Phillips will have after it completes its $8.2 billion buyout of Tosco. Exxon Mobil, the largest publicly traded oil company, has daily U.S. refining capacity of about 1.94 million barrels.

Buying Ultramar will add $1.70 a share to earnings in the first year, Greehey predicted. The merger of the San Antonio-based companies will save $190 million in the first year, $240 million in the second, and "significantly more after that," Greehey said on a conference call.

"Those numbers will go up significantly once we get our people working together," Greehey said. "There's going to be a lot of synergies that we can make that increase profit and reduce costs."

Shares of Valero fell $2.77 to $42.70. They have risen 49 percent in the past year. Ultramar rose $7.79 to $50.50. They have climbed 96 percent in the past year.

Valero will get seven more refineries, bringing its total to 13. Its holdings will include the 100,000 barrel-a-day Wilmington refinery in California, where gasoline prices are well above the U.S. average because of strict environmental rules. After the buyout, Valero will have annual revenue of $32 billion.

Valero and Ultramar competed last year to buy Exxon Mobil's refinery in Benicia, Calif. Valero won, buying the refinery for $1.02 billion and also getting 350 gasoline stations in California, its first retail outlets.

Ultramar Diamond itself was created in 1996 when Ultramar Corp. bought Diamond Shamrock Inc. for about $2 billion. The company's stores sell gasoline under the Ultramar, Diamond Shamrock, Beacon and Total brands.

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