Refining Giants Valero, UDS to Combine in $6B Transaction

In a merger that would create the second largest refiner of petroleum products in the United States behind ExxonMobil Corp., San Antonio-based Valero Energy Corp. and Ultramar Diamond Shamrock Corp. (UDS) announced last week that they have entered into an agreement in which Valero will acquire UDS in a transaction valued at $6 billion.

The new combined company would consist of 23,000 employees in the United States and Canada, 13 refineries, and a total throughput capacity of just under 2 MMb/d. Valero also will be one of the nation's largest retailers with more than 5,000 retail outlets in the United States and Canada.

"We're combining the two best independent refining and marketing companies to make the premier refiner and marketer in the U.S.," said Bill Greehey, Valero's CEO. "Obviously this will bring tremendous benefits to both of our organizations and to our shareholders. In fact, in refining and marketing, we will be the only major independent of a size and scope equal to the majors."

The combined company would have annual revenues of $32 billion, with total assets equaling more than $10 billion. UDS shareholders are expected to hold 40% of the new organization. Valero will pay about $4 billion and pick up about $2 billion in UDS debt.

With the combination of assets, Valero said it will have the most geographic diversity among U.S. refiners. UDS' seven refineries will expand Valero's position in Texas and California, while giving it new locations in Colorado, Oklahoma and Quebec. Both Valero's and UDS' facilities produce cleaner burning fuels such as reformulated gasoline, CARB gasoline and CARB Diesel, which sell at a premium over conventional gasoline.

Greehey said the two San Antonio-based companies coming together would create synergies with an estimated benefit of $200 million annually. He added that the timing of the transaction could not be better with regard to refining industry fundamentals.

"The current industry fundamentals and the long-term outlook for our business have never been better," said Greehey. "Refined product inventories continue to trend at historically low levels. At the same time, gasoline and distillate demand remain strong. With limited excess refining capacity in the U.S., there is very little room for inventories to build substantially in the near future. This should continue to keep the supply/demand balance tight and support healthy refining margins going forward.

"We continue to see gasoline demand better than last year's levels and expect to see a good driving season," he added. "And now more than ever, Valero is poised to seize the greatest benefits from these fundamentals because we will continue to have the most leverage to improved refining margins."

The acquisition --- expected to close by year's end --- will leave Greehey in position as chairman and CEO, while the board of directors will grow to 13 to accommodate the addition of four UDS directors. Jean Gaulin, chairman and CEO of UDS, will advise Greehey on the structure of the new Valero until the completion of the merger, when he will retire and leave his position on the board. The transaction has already been approved by both sets of directors, with approvals from shareholders and regulatory organizations still pending.

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