Frontier, Holly oil refiners to merge

02/23/2011 12:00 AM

02/23/2011 12:05 AM

Refinery operators Holly Corp. and Frontier Oil Corp. are combining in an all-stock deal valued at nearly $3 billion.

Both companies said Tuesday that the deal will create the most profitable independent U.S. refiner on a per barrel basis. The new company will have a refining capacity of more than 440,000 barrels a day across five refineries.

Frontier has a refinery in El Dorado.

Analysts had been expecting the industry to consolidate after the business rebounded last year and made refining assets attractive to prospective buyers. Refineries that had struggled to pass on high oil prices during the recession started to see profits surge last year as demand grew for gasoline, diesel and other fuels.

Marathon Oil announced earlier this year that it was spinning off its refining business and ConocoPhillips plans to minimize its refining arm from 24 percent to 15 percent of its core business.

Frontier shareholders will get 0.4811 Holly shares for each Frontier share they own, and Houston-based Frontier plans to chip in a special dividend worth 28 cents a share. Based on Frontier's number of shares outstanding, the transaction is valued at $2.85 billion. The companies said the transaction has an enterprise value of $7 billion.

Altogether, including the special dividend, Frontier's investors will receive $27.27 a share based on Holly's closing price on Friday.

Frontier also plans to reinstate its quarterly dividend of 6 cents a share. Both dividends will be paid on March 21 to Frontier shareholders of record on March 7.

Holly anticipates still paying its dividends through the deal's closing. The Dallas-based company has an annual dividend of 60 cents a share.

Holly stockholders are expected to own 51 percent of the combined company, with Frontier shareholders owning the remaining stake.

The combination is expected to save at least $30 million through lower selling, general and administrative expenses and more operational efficiencies.

The new company, based in Dallas, will be called HollyFrontier Corp. It will serve the Mid-Continent, Rocky Mountain and Southwest refining markets and will have access to growing domestic and Canadian crude oil supplies.

Frontier chairman, president and CEO Mike Jennings and Holly chairman and CEO Matt Clifton said in a joint statement that the transaction increases their geographic coverage and diversity of assets.

"We expect this transaction to deliver meaningful value to our shareholders, as it provides significant growth potential via a combined company that is better positioned in an increasingly competitive industry," they said.

Both companies' boards have unanimously approved the deal. Jennings will become CEO and president, and Clifton will serve as executive chairman.

The combined company's board will include 14 members, with seven each from Frontier and Holly's existing boards.

The transaction is expected to close early in the third quarter and needs the approval of both companies' stockholders.

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