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Kerkorian Plans $1.4 Billion Offer for 16% of Tesoro
By Joe Carroll
Oct. 26 (Bloomberg) -- Kirk Kerkorian's Tracinda Corp. plans a $1.4
billion tender offer to acquire a 16 percent stake in Tesoro Corp., a
U.S. refiner whose profit jumped 10-fold in the past four years as
gasoline demand and prices climbed.
The offer will be for 21.9 million shares of San Antonio- based Tesoro
at $64 each, Los Angeles-based Tracinda said today in a statement. The
price is 12 percent higher than yesterday's close. Tesoro had its
biggest share gain in almost five years.
Kerkorian, a 90-year-old billionaire, will become Tesoro's largest
shareholder, with a 20 percent stake. Analysts said the offer is a
vote of confidence in Tesoro's management, led by Chief Executive
Officer Bruce Smith, rather than a prelude to a takeover.
``This offer is indicative of the view that among the independent
refiners, Tesoro's management team has been executing very well and
that the fundamentals of the refining industry in the U.S. remain
strong,'' said Ann Kohler, an analyst at Caris & Co. ``Clearly,
Mr. Kerkorian views this company as undervalued, and he expects it to
go higher than the $64 price in the future.''
Tesoro shares rose $7.28, or 13 percent, to $64.48 in New York Stock
Exchange composite trading. The gain was Tesoro's biggest since
December 2002. Before today, the shares had jumped 74 percent this
year, the biggest gain among members of the Standard & Poor's
Supercomposite Oil & Gas Refining & Marketing Index.
Premium Price
Kerkorian is offering a premium price because ``it's hard to be quiet
when you're buying this many shares,'' said Daniel Scalzi, chief
executive officer at research firm Matrix USA LLC in New York. ``What
he's saying by paying this premium is, `Let's get this over with, and
I'll pay up for it.'''
Kerkorian probably will push Tesoro to funnel more of its cash flow
into dividends and share buybacks, especially once debt from Tesoro's
May acquisition of a Royal Dutch Shell Plc refinery near Los Angeles
is paid off, said Roger Read, an analyst at Natixis Bleichroeder
Inc. in Houston.
``This looks to be more on the harvest side than the growth side,''
Read said. ``I don't think this is about trying to build a refining
business now when there's a lot of private equity out there chasing
assets that have increased.''
Tesoro has the highest free cash flow per share among independent U.S.
refiners, including Valero Energy Corp., which is more than triple
Tesoro's size by sales.
Low Yield
Tesoro also has the second-lowest dividend yield among independents,
or refiners that don't also own oil wells, according to data compiled
by Bloomberg.
Only Houston-based Frontier Oil Corp. has a lower yield.
Kerkorian declined through spokesman Tom Johnson to be interviewed for
this story. A Tesoro spokesman didn't respond to a telephone message
seeking comment.
``Tracinda believes that the fundamentals of the petroleum refining
industry make it an attractive area for investment,'' Kerkorian's
statement said. ``Tracinda has chosen to invest in Tesoro because
Tracinda believes that the company is well positioned within the
industry and has a management team that is effectively executing its
strategic plan.''
Unlike activist investor Carl Icahn, who has pressed for asset sales
and other steps at such companies as Time Warner Inc. and the
since-acquired Kerr-McGee Corp., Kerkorian typically doesn't look for
a quick return, said Scott Keller, president of Dealanalytics.com.
Long-Term Investor
``Icahn is a much more short-term investor, whereas Kerkorian is more
of a long-term investor,'' Keller said. ``Kerkorian is looking at
cheap assets here.''
Kerkorian, a former welterweight boxing champion raised on a ranch in
California's San Joaquin Valley, made his fortune investing in move
studios, hotels, casinos and automakers. Forbes magazine named him the
seventh-richest American, with an estimated net worth of $18 billion.
Kerkorian's holdings include a 56 percent stake in Las Vegas casino
operator MGM Mirage, which he founded in 1986. His 1990s investments
in Chrysler yielded a $2.7 billion profit when Daimler-Benz AG
acquired the automaker in 1998.
His bid last year to force General Motors Corp. into an alliance with
Renault SA and Nissan Motor Co. failed.
Tesoro owns seven refineries that can process 669,000 barrels of oil a
day into gasoline, diesel, jet fuel and kerosene. The two biggest
plants are in California, the largest U.S. motor-fuel market and home
to the nation's highest gasoline prices outside Hawaii, where Tesoro
also has a refinery.
Acquisitions
The company spent $3.4 billion in the past six years acquiring
refineries, gasoline stations and storage terminals as CEO Smith
capitalized on widening profit margins on processing oil into fuels.
``Over the last several years, they've continued to make fine
acquisitions,'' said Kohler of Caris & Co. ``They've also done a very
good job of adding to their management ranks, and that's led to very
good performance at their refineries.''
Tesoro strengthened its operational skills by recruiting refinery
personnel from Royal Dutch Shell Plc, the world's second-largest fuel
processor, and Valero, Kohler said.
Credit Suisse analyst Mark Flannery said Tesoro shares are already
overvalued and advised holders of refining shares to sell. Flannery
has a neutral rating on the shares.
U.S. fuel makers may struggle to sustain profits next year as BP Plc
plants in Texas and Indiana finish repairs and increase gasoline
output, and wholesalers use more ethanol, Flannery said.
``We believe, unlike Tracinda, that 2008 will be a challenging time
for U.S. refiners,'' Flannery said today in a note to clients. ``We
would use the Kerkorian-inspired strength in the group to lighten
up.''
Shares of Valero and other refiners, including Sunoco Inc., Frontier
and Holly Corp., also rose today. El Paso, Texas-based Western
Refining Inc. had the biggest gain, at 6.1 percent.
To contact the reporter on this story: Joe Carroll in Chicago at
[email protected]_ (mailto:[email protected]) Last
Updated: October 26, 2007
16:11 EDT
By Joe Carroll
Oct. 26 (Bloomberg) -- Kirk Kerkorian's Tracinda Corp. plans a $1.4
billion tender offer to acquire a 16 percent stake in Tesoro Corp., a
U.S. refiner whose profit jumped 10-fold in the past four years as
gasoline demand and prices climbed.
The offer will be for 21.9 million shares of San Antonio- based Tesoro
at $64 each, Los Angeles-based Tracinda said today in a statement. The
price is 12 percent higher than yesterday's close. Tesoro had its
biggest share gain in almost five years.
Kerkorian, a 90-year-old billionaire, will become Tesoro's largest
shareholder, with a 20 percent stake. Analysts said the offer is a
vote of confidence in Tesoro's management, led by Chief Executive
Officer Bruce Smith, rather than a prelude to a takeover.
``This offer is indicative of the view that among the independent
refiners, Tesoro's management team has been executing very well and
that the fundamentals of the refining industry in the U.S. remain
strong,'' said Ann Kohler, an analyst at Caris & Co. ``Clearly,
Mr. Kerkorian views this company as undervalued, and he expects it to
go higher than the $64 price in the future.''
Tesoro shares rose $7.28, or 13 percent, to $64.48 in New York Stock
Exchange composite trading. The gain was Tesoro's biggest since
December 2002. Before today, the shares had jumped 74 percent this
year, the biggest gain among members of the Standard & Poor's
Supercomposite Oil & Gas Refining & Marketing Index.
Premium Price
Kerkorian is offering a premium price because ``it's hard to be quiet
when you're buying this many shares,'' said Daniel Scalzi, chief
executive officer at research firm Matrix USA LLC in New York. ``What
he's saying by paying this premium is, `Let's get this over with, and
I'll pay up for it.'''
Kerkorian probably will push Tesoro to funnel more of its cash flow
into dividends and share buybacks, especially once debt from Tesoro's
May acquisition of a Royal Dutch Shell Plc refinery near Los Angeles
is paid off, said Roger Read, an analyst at Natixis Bleichroeder
Inc. in Houston.
``This looks to be more on the harvest side than the growth side,''
Read said. ``I don't think this is about trying to build a refining
business now when there's a lot of private equity out there chasing
assets that have increased.''
Tesoro has the highest free cash flow per share among independent U.S.
refiners, including Valero Energy Corp., which is more than triple
Tesoro's size by sales.
Low Yield
Tesoro also has the second-lowest dividend yield among independents,
or refiners that don't also own oil wells, according to data compiled
by Bloomberg.
Only Houston-based Frontier Oil Corp. has a lower yield.
Kerkorian declined through spokesman Tom Johnson to be interviewed for
this story. A Tesoro spokesman didn't respond to a telephone message
seeking comment.
``Tracinda believes that the fundamentals of the petroleum refining
industry make it an attractive area for investment,'' Kerkorian's
statement said. ``Tracinda has chosen to invest in Tesoro because
Tracinda believes that the company is well positioned within the
industry and has a management team that is effectively executing its
strategic plan.''
Unlike activist investor Carl Icahn, who has pressed for asset sales
and other steps at such companies as Time Warner Inc. and the
since-acquired Kerr-McGee Corp., Kerkorian typically doesn't look for
a quick return, said Scott Keller, president of Dealanalytics.com.
Long-Term Investor
``Icahn is a much more short-term investor, whereas Kerkorian is more
of a long-term investor,'' Keller said. ``Kerkorian is looking at
cheap assets here.''
Kerkorian, a former welterweight boxing champion raised on a ranch in
California's San Joaquin Valley, made his fortune investing in move
studios, hotels, casinos and automakers. Forbes magazine named him the
seventh-richest American, with an estimated net worth of $18 billion.
Kerkorian's holdings include a 56 percent stake in Las Vegas casino
operator MGM Mirage, which he founded in 1986. His 1990s investments
in Chrysler yielded a $2.7 billion profit when Daimler-Benz AG
acquired the automaker in 1998.
His bid last year to force General Motors Corp. into an alliance with
Renault SA and Nissan Motor Co. failed.
Tesoro owns seven refineries that can process 669,000 barrels of oil a
day into gasoline, diesel, jet fuel and kerosene. The two biggest
plants are in California, the largest U.S. motor-fuel market and home
to the nation's highest gasoline prices outside Hawaii, where Tesoro
also has a refinery.
Acquisitions
The company spent $3.4 billion in the past six years acquiring
refineries, gasoline stations and storage terminals as CEO Smith
capitalized on widening profit margins on processing oil into fuels.
``Over the last several years, they've continued to make fine
acquisitions,'' said Kohler of Caris & Co. ``They've also done a very
good job of adding to their management ranks, and that's led to very
good performance at their refineries.''
Tesoro strengthened its operational skills by recruiting refinery
personnel from Royal Dutch Shell Plc, the world's second-largest fuel
processor, and Valero, Kohler said.
Credit Suisse analyst Mark Flannery said Tesoro shares are already
overvalued and advised holders of refining shares to sell. Flannery
has a neutral rating on the shares.
U.S. fuel makers may struggle to sustain profits next year as BP Plc
plants in Texas and Indiana finish repairs and increase gasoline
output, and wholesalers use more ethanol, Flannery said.
``We believe, unlike Tracinda, that 2008 will be a challenging time
for U.S. refiners,'' Flannery said today in a note to clients. ``We
would use the Kerkorian-inspired strength in the group to lighten
up.''
Shares of Valero and other refiners, including Sunoco Inc., Frontier
and Holly Corp., also rose today. El Paso, Texas-based Western
Refining Inc. had the biggest gain, at 6.1 percent.
To contact the reporter on this story: Joe Carroll in Chicago at
[email protected]_ (mailto:[email protected]) Last
Updated: October 26, 2007
16:11 EDT