Icahn Pushing CVR Sale Means $1 Billion for Investors: Real M&A

Icahn Enterprises LP. Chairman Carl Icahn
Carl Icahn, chairman of Icahn Enterprises LP. Photographer: Rick Maiman/Bloomberg

Potential acquirers could scoop up CVR Energy Inc. at the cheapest takeover valuation on record for a U.S. oil refiner and still reward shareholders with a billion dollar windfall.

Even with the stock’s 24 percent gain since billionaire Carl Icahn disclosed an investment in January, a buyer could offer about a 40 percent premium and still purchase CVR at the lowest valuation relative to earnings of any takeover greater than $500 million in the U.S. oil refining and marketing industry, according to data compiled by Bloomberg. Icahn, CVR’s biggest investor, urged the Sugar Land, Texas-based company this week to put itself up for sale.

While Icahn failed to secure takeovers of companies from Clorox Co. to Mentor Graphics Corp. last year, CVR may attract interest from HollyFrontier Corp. and private equity-backed Northern Tier Energy Inc., said John Auers, an oil industry consultant at Turner, Mason & Co. The $2.4 billion company owns two refineries in Kansas and Oklahoma, which are near U.S.- produced oil that traded at a record discount to global prices last year as new production techniques such as “fracking” flooded the Midwest market with cheaper crude. Depressed prices are boosting CVR’s profit from turning the fuel into gasoline.

“It’s trading at a very inexpensive valuation,” Walter Todd, who oversees $940 million as chief investment officer at Greenwood Capital in Greenwood, South Carolina, said in a telephone interview. “Refiners in general are cheap right now. To the extent that there’s consolidation in the refining business, CVR is of the size that makes that a little bit easier. It’s easier to make changes with a $2 billion company than it is with a company like Clorox.”

Oil Refineries

Neale Hickerson, a spokesman for HollyFrontier, said the company doesn’t comment on market speculation. Northern Tier Chief Executive Officer Mario Rodriguez didn’t return a call seeking comment.

“We’re a public company and we entertain any offers, but I can’t comment on speculation,” said Steve Eames, a CVR spokesman.

CVR rose 5.8 percent to $29.20 at 2:40 p.m. in New York, the highest intraday level in five months, after Icahn announced a tender offer to buy the company for $30 a share. The proposal includes a contingent value right entitling investors who tender their shares to an additional payment if a buyer offers more money in the next nine months. A strategic buyer could pay at least $37 a share, he said in today’s statement. Icahn said he will proceed with the offer and nomination of 9 directors if the company is not put up for sale.

‘Cut and Dry’

CVR’s refineries in Coffeyville, Kansas, and Wynnewood, Oklahoma, are capable of processing a combined 185,000 barrels a day and have access to cheaper crude being produced from shale rock formations in emerging U.S. oil fields. The company, which also owns a majority interest in fertilizer-producer CVR Partners LP, was taken public in 2007 by Goldman Sachs Group Inc.

Icahn, who made millions in the 1980s pressuring companies from USX Corp. to Texaco Inc. to split up or increase dividends and buybacks, disclosed in a regulatory filing made public on Jan. 13 that he owned a 14.5 percent stake in CVR through subsidiaries of his holding company, Icahn Enterprises LP.

The hedge fund manager told CVR Chairman and CEO Jack Lipinski on Feb. 13 that he should put CVR up for sale to profit from higher gasoline prices.

“We think there’s a lot more value in it if it were sold,” Icahn, 76, said in a phone interview yesterday. “It’s just cut and dry. This company is worth a lot more if it’s sold to another refinery where they could get the synergies and, more importantly, the ability to lock in a lot of the crack spread.”

Crack Spread

CVR’s earnings have been boosted by a widening of the so-called “crack spread,” a measure of refining profitability that tracks the gap between oil costs and fuel prices. The crack spread rose to an all-time high of $37.96 for operators in the Midwest on Aug. 19, data compiled by Bloomberg show. The 2011 average of $25.11 was more than double the spread in 2010.

CVR’s advantage among refiners is driven by a 14 percent increase in average U.S. crude production in the first 11 months of 2011 compared with 2008, including in North Dakota’s Bakken field, where output has more than tripled in that time, according to the U.S. Energy Information Administration.

New production techniques, including hydraulic fracturing, known as fracking, have unlocked oil and natural gas previously trapped in shale rock formations. In fracking, a mixture of water, sand and chemicals is shot underground to blast apart rock and free fossil fuels.

‘Cheap Crude’

Higher output has depressed the cost of crude for refiners such as CVR who operate in the Midwest, near the new wells. Oil there has traded at a record $15.69 discount to the global crude benchmark, which is used to set gasoline prices, according to data compiled by Bloomberg. That means for every barrel processed at a refinery, they may pay $15.69 less than a competitor on the East Coast or West Coast for crude that is turned into gasoline and diesel fuel.

“Some of these refineries near cheap crude are among the most profitable in the world right now,” Auers, of Dallas-based consultancy Turner, said in a phone interview. “Over the last three or four years, especially more recently, the explosion of crude production in North Dakota in the Bakken field and strong growth in Canadian production has saturated the Midwest with crude oil.”

HollyFrontier, formed by Holly Corp.’s almost $3.5 billion purchase of Frontier Oil Corp. last year, and private equity-backed Northern Tier, which has filed for an initial public offering, may see CVR as an opportunity to expand their footprint in areas with access to cheap crude, Auers said.

$1 Billion Windfall

CVR would command at least $34 a share in a takeover, about 23 percent more than yesterday’s closing price of $27.60, Sam Margolin, an analyst with Global Hunter Securities LLC in New York, said in a phone interview this week.

Even if an acquirer were to pay as much as $38.78 a share, or about a 40 percent premium, CVR’s equity, net cash and minority interests would still be cheaper relative to earnings before interest, taxes, depreciation and amortization than any other takeover of a U.S. oil refiner and marketer greater than $500 million, data compiled by Bloomberg show. The industry’s lowest Ebitda multiple was Valero Energy Corp.’s purchase of Ultramar Diamond Shamrock Corp. at 4.86 times Ebitda, announced in 2001, the data show.

A takeover of CVR at a 40 percent premium would equate to an equity value of almost $3.4 billion, which is $1 billion more than its market value as of yesterday. CVR has more than $300 million in net cash and $148 million in minority interests.

Finding a Buyer

“Icahn is attempting to pull forward returns for the shareholder that otherwise may not be delivered until sometime out in the future,” Ted Harper, who helps manage $6.8 billion for Frost Investment Advisors LLC in Houston, said in a phone interview. “I would definitely think that the asset could be something that would attract some interest.”

While CVR looks cheap, it may be difficult to find a buyer that wants to own the entire company, including the majority interest in fertilizer-producer CVR Partners, said Louis Meyer, a special situations analyst at Oscar Gruss & Son Inc.

“It’s probably not going to be sold unless you find a buyer that absolutely wants to participate in the fertilizer market,” Meyer, who’s based in New York, said in a phone interview. “That makes it a little less attractive to somebody wanting to just get pure refining capability.”

Clorox, Lions Gate

Icahn failed in advocating for a takeover of Clorox last year, even after offering to backstop an auction for the bleach maker. Since the start of 2010, power producer Dynegy Inc., software company Mentor Graphics, film maker Lions Gate Entertainment Corp. and steel-scrap recycler Commercial Metals Co. also received acquisition offers from Icahn that were never consummated.

This time around, potential buyers for CVR may include Western Refining Inc., HollyFrontier, Tesoro Corp., Valero, Marathon Petroleum Corp. and ConocoPhillips, Icahn said in the interview yesterday.

“The synergies, some are bigger than others, some have the cash, some don’t, so it would depend,” Icahn said in the interview. “But I think that the synergies and the diversification aspects of a transaction for one of these guys would be very compelling.”

Western spokesman Gary Hanson, Valero spokesman Bill Day, Marathon Petroleum spokeswoman Angelia Graves and ConocoPhillips spokesman Rich Johnson declined to comment on market speculation. Tesoro didn’t respond to a call to its general media line or an e-mail seeking comment.

“Icahn obviously has a very good long-term track record with these types of issues,” said Todd of Greenwood Capital. “I wouldn’t necessarily bet against him. He’s had a few misses. He may be due to come through on one.”

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