Hess Files for Tax-Free Spinoff of Gas-Station NetworkJim Polson
Hess Corp., the U.S. oil producer that came under pressure from activist investor Paul Singer to streamline operations last year, filed paperwork for the spinoff of its gasoline stations.
The separation would be tax free and distribute all shares in newly formed Hess Retail Corp. to holders of Hess Corp., according to a filing by the New York-based company today. Hess will continue to seek a buyer for the unit while pursuing the spinoff, which may occur this year, said Dennis Moynihan, a company spokesman.
Hess is the largest owner of convenience stores along the East Coast with operations in 15 states and the District of Columbia, according to today’s filing. The stores are known for selling company-branded toy trucks at Christmas time. Hess announced last year it would close or sell its refineries and divest the retail business to focus on oil production and exploration after criticism from Singer’s Elliott Management Corp.
“I, for one, am in favor of a spin because it will keep the Hess brand name which has some value and the company won’t pay any taxes,” Fadel Gheit, a New York-based analyst for Oppenheimer & Co., said today in a phone interview. The business may be worth $2 billion, although a competitor seeking to re-brand the outlets might pay less, said Gheit, who rates Hess shares a buy and owns none.
The filing leaves undetermined the amount of stock each Hess holder would receive in Hess Retail, which would trade on the New York Stock Exchange as HRE. It also doesn’t specify a date for the spin. No shareholder vote is needed to approve the action.
Hess operates 1,258 fuel and food outlets from Florida to New Hampshire and is the largest Dunkin’ Donuts Inc. franchisee by number of sites, according to the filing. The business includes 81 travel plazas, including interstate highway stops that are as large as 10,700 square feet.
The company had $943 million invested in the retail business as of Sept. 30, according to the filing.
Hess outlets are branded as Hess, Hess Express and Wilco Travel Plaza. The company agreed last month to pay $290 million to buy out its partners in Hess Wilco Holdings, in which it held a 44 percent stake.
The spinoff filing was issued before the start of regular trading in New York. Hess rose 1 percent to $81.69 at the close in New York. The shares have gained 47 percent in the past year.
The company has been selling assets and streamlining operations and in May added new board members to head off a proxy fight with Elliott Management, its second-largest shareholder, according to data compiled by Bloomberg. Hess raised $6.5 billion from asset sales last year, Chief Executive Officer John Hess said in November, which doesn’t include a December agreement to sell Indonesia offshore assets for $1.3 billion.
Other energy companies, including ConocoPhillips and Marathon Oil Corp., have spun off retail stations as part of splitting refining operations from oil production.
“They have one of the best-looking systems on the East Coast,” Gary Heminger, chief executive officer of Marathon Petroleum Corp., said on an Oct. 31 earnings conference call. “It would be an excellent fit with Speedway,” the refining company’s retail brand, he said.
Acquisition of the Hess operations for about $2 billion would be “accretive and positive” for Alimentation Couche-Tard Inc., the largest pure-play convenience store operator in North America behind 7-Eleven Inc., Peter Sklar, a Toronto-based analyst for BMO Capital Markets wrote today in a note to clients.
Hess supplies all the motor fuel for its branded stations. After the separation, the unit would buy 75 to 80 percent of its fuel from third parties under long-term contracts, with the rest bought on spot markets.
The company, which is run by the son of founder Leon Hess, makes toys it has sold annually at its gasoline stations since 1964. After the spinoff, the stations would continue to sell the toys, which would be designed and manufactured by the former parent company under a planned agreement, according to the filing. The green-and-white models have ranged from tanker-trailers to equipment haulers.