Saturday, March 20, 2004

Ashland leaving oil business

$2.9B deal with Marathon shrinks debt

By Mike Boyer
The Cincinnati Enquirer

Covington's Ashland Inc. will leave the oil refining and marketing business and eliminate almost all of its debt under a complex $2.9 billion deal announced Friday to sell its stake in Marathon Ashland Petroleum (MAP) LLC to Marathon Oil Corp.

The move will end Ashland's 80 years in the oil business. The company started in 1924 as the refining arm of the Swiss Oil Co. of Lexington, operating what then was a small refinery in Catlettsburg, Ky.

The big question now is what Ashland will do with proceeds from the sale besides reduce its debt.

Under the deal, MAP - the Midwest's largest oil refiner and the operator of Marathon, Speedway and SuperAmerica stations - would become a wholly-owned unit of Houston-based Marathon. The transaction is expected to be completed by year-end.

The deal is structured as a tax-free transaction for Ashland shareholders and thus requires Internal Revenue Service approval. It calls for Ashland investors to receive $315 million in Marathon stock (currently valued at $4.50 a share) while Ashland Inc. would receive $2.7 billion in cash and accounts receivable.

In addition, Ashland would sell Marathon a small petrochemical operation, adjacent to MAP's Catlettsburg refinery, and 61 Valvoline Instant Oil Change sites in Michigan and northwestern Ohio for about $94 million.

Under the six-year joint venture agreement that gave Ashland 38 percent of MAP, Marathon has an option to buy out Ashland at a premium starting next year.

Ashland, which had earnings of $75 million on revenues of $2.7 billion last year, also owns automotive products, highway construction and specialty chemical businesses.

James J. O'Brien, Ashland's chairman and CEO, said the agreement eliminates uncertainty over Ashland's stake in MAP and a potentially large tax liability.

While Ashland cautioned that failure to get IRS approval would cancel the deal, executives for Marathon and Ashland said they thought that the transaction would pass muster.

Ashland shareholders and antitrust regulators also must approve the deal.

Focus on other products

O'Brien said divesting MAP will allow Ashland to continue focusing on increasing its wholly owned specialty chemical and transportation products businesses.

"This offers the best value for Ashland and its shareholders," he told investment analysts.

While Ashland's stake in MAP generated $285 million in earnings last year, O'Brien said oil refining is a cyclical business that requires heavy capital investment.

"I think it's positive" for Ashland, said Fadel Gheit, oil industry analyst for Oppenheimer & Co.

The price is at the high end of the $2.5 billion to $3 billion that Gheit estimated Ashland would receive for its stake.

Ashland's shares closed Friday at $48.66, up $1.95 after briefly trading as much as 10 percent higher.

Shares of Marathon, which plans to issue $1 billion in stock and $1.9 billion in debt to pay for the deal, slipped $1.44 to close at $33.97.

Marathon CEO Clarence P. Cazalot said the deal will allow MAP, the nation's fifth-largest oil refinery, to leverage its leading position in the Midwest - a region likely to see more refinery closings in the next couple of years because of tougher clean air rules.

Gheit said most investors have already factored the sale into Ashland's share price, so he expected little upward movement in the stock.

Proceeds to pay off debt

O'Brien said the company won't use the money to repurchase stock or pay a special dividend to shareholders.

He said the company plans to use most of the proceeds to eliminate all or most of its $1.5 billion in outstanding debt and build its cash position. Since taking over as CEO in 2002, O'Brien has cut Ashland's debt by $233 million.

He also said the company won't be going on an acquisition spree.

"We are not going to relax our investment standards," he said. Rather, Ashland would look for opportunities to extend its existing businesses, he said.

But Gheit said growing Ashland's existing businesses, including Lexington-based Valvoline and its Columbus-based specialty chemical business, will be difficult because they aren't market leaders.

And he said the deal, which would leave Ashland with about $500 million in cash on its balance sheet, could make Ashland a takeover target.

O'Brien said Ashland "had no interest in going private'' after the sale was completed.


Deal at a glanceHere's what Ashland Inc.'s deal to sell its 38 percent stake in Marathon Ashland Petroleum (MAP) LLC means.

No change in the operation of MAP's seven Midwest refineries and nearly 6,000 retail outlets, including Speedway and SuperAmerica locations.

Ashland Inc. and its shareholders receive nearly $3 billion in Marathon stock and cash.

Marathon will own all of MAP.

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