Valero to Separate Retail Unit Valued Up to $5 Billion

Valero Plans to Pursue Separation of Retail Business
Customers buy gasoline at a Valero Energy Corp gas station in San Francisco, California. Photographer: David Paul Morris/Bloomberg

Valero Energy Corp., the largest U.S. refiner by processing capacity, plans to sell or spin off its network of fuel stations, a business that may be worth as much as $5 billion.

The board of directors has approved the separation, San Antonio-based Valero said in a statement today. The unit’s value will be improved as a standalone entity, the company said in a statement. Credit Suisse AG is advising the company. Valero rose 5.4 percent to $27.50 at the close in New York, the biggest gain in six weeks.

Valero’s retail business generates $500 million annually in earnings before interest, taxes, depreciation and amortization, Chairman and Chief Executive Officer Bill Klesse said on a conference call with investors today. The unit’s earnings potential is comparable to other retailers that trade at a multiple of about 10 times Ebitda, Klesse said.

“The whole business is an extremely solid business,” Klesse said. “We’re up with the very best.” Based on Klesse’s comparison, Valero’s retail segment would be valued at as much as $5 billion, according to Bloomberg calculations.

A lower valuation of five to seven times Ebitda, or $2 billion to $2.8 billion, is possible for Valero’s retail segment, which includes more than a thousand company-owned and branded gasoline and diesel stations in the U.S. and Canada, Cory Garcia, a Houston-based analyst with Raymond James & Associates Inc., said in an e-mail today.

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Spinning off the retail business is the latest step in Klesse’s effort to increase shareholder returns, which has included boosting the company’s dividend and promising to buy back stock, Fadel Gheit, a New York-based analyst at Oppenheimer & Co., said in a telephone interview today.

“Valero is the largest refiner in the U.S. and is by far the most undervalued,” said Gheit, who rates Valero the equivalent of buy and doesn’t own shares. “He is frustrated.”

Retail stores trade at five to seven times EBITDA compared with refiners, which trade at a multiple of 3.5, Garcia said. Valero’s retail operating income has been above $400 million, he said. The segment reported record operating income of $172 million in the second quarter, from $135 million a year earlier, the company said.

“As independent companies, both retail and the remaining business will be better-positioned to focus on their industry-specific strategies,” Klesse said in the statement.

Valero’s second-quarter profit rose as access to cheaper crude produced in the U.S. led to a rally in the margin between oil costs and fuel prices. Net income rose to $831 million, or $1.50 a share, from $744 million, or $1.30, a year earlier. Per-share profit was 10 cents more than the average of four analysts’ estimates compiled by Bloomberg.

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