Mid-Major Refiner Selling Off Corner Stores?

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San Antonio-based Valero's (NYSE: VLO) long-awaited spin-off of its 1,800-location Corner Stores (CST) convenience store chain has taken several important steps forward. It now appears likely that the company will spin off the retail entity as a separate publicly-traded company within the first half of 2013. If all goes according to plan, current Valero shareholders would receive stakes in the new company on a tax-free basis.

About Valero and Corner Stores

Valero is a mid-major gasoline refiner and retailer. Unlike its larger rivals, it does not engage in large-scale exploration and drilling activities. Instead, it concentrates on refining and selling the petroleum products that it sources from various sites around the Western Hemisphere. In addition to its soon-to-be-independent Corner Stores brand, the company operates thousands of additional retail stores under several brand names. It employs nearly 22,000 people and earned $1.1 billion on $138.3 billion in revenue in 2011.

Corner Stores will be a major regional convenience-store chain. With nearly 2,000 stores and plans to expand that number by several dozen per year, the company is expected to claim revenue of several billion dollars after becoming independent. With over 750 stores in the country, it will have a sizable presence in the Canadian convenience-store market as well. In addition to selling traditional items like milk, cigarettes, candy and alcohol, the company will engage in several cross-promotional ventures with firms like RedBox.

How the deal is structured

Under the terms of the deal, Valero's current shareholders will collectively receive an 80 percent stake in the Corner Stores business. As of yet, an offering price has not been set for the new company. If similar past spin-offs are any indication, Valero shareholders should receive shares in the new company on a one-to-one basis. The refiner will retain a 20 percent stake in the company.

Most of Corner Stores’ managers and executives will transfer from within the ranks of Valero's leadership. Current Valero executive vice president Kim Bowers is expected to helm the new company.

Complications and competition

At this point, there appear to be few roadblocks that stand in the way of this deal. Although the results of Valero's petition to classify the spin-off as a tax-free distribution are still pending, there is no evidence to indicate that the petition will be denied. In addition, the deal will require the approval of Valero's current board of directors. This is not expected to be a problem. Should both of these conditions be satisfied, the spin-off is likely to wrap up by the end of the first half of 2013.

Long-term prospects

It is important to note that Valero is not exiting the convenience-store business. The company still operates a number of retail food mart locations at its Texaco, Diamond Shamrock, Ultramar, Beacon and Shamrock gas stations across North America. After the Corner Stores spin-off, the company will still operate about 5,000 retail outlets of various sizes.

However, Valero clearly wishes to re-focus its efforts on the refining and gasoline-retailing components of its business. Its shareholders appear to agree that the company could benefit from this strategic shift: Since the official late-July announcement of the spin-off, the company's shares have risen from about $25 per share to interim highs near $36 per share. Investors who bought into the company shortly after the announcement have realized a return of more than 45 percent over the past six months.

In fact, some investors may wish to play this spin-off by waiting until it has been finalized and purchasing shares of the newly-independent Valero. Following in the footsteps of Conoco (NYSE: COP) and Murphy Oil (NYSE: MUR), this new entity appears poised to compete more aggressively against larger refiners as well as integrated majors like ExxonMobil. For its part, Murphy Oil is in the process of completing its own spin-off: The company has committed to separating its exploration-and-drilling arm from its retailing-and-refining arm. Conoco spun off Phillips 66 last year to separate its refining business from the producing/exploration business. In a world that's increasingly dominated by integrated conglomerates, smaller firms like Murphy and Valero may have no choice but to slim down and focus more narrowly on core operations.

However, Corner Stores offers plenty of promise. The company has launched some novel new promotions, including offering free music downloads with drink purchases. Its loyalty program has millions of subscribers across the American South and Midwest. Finally, it has mounted an aggressive acquisition campaign that has added hundreds of existing stores to its portfolio during the past several years.

In sum, investors might benefit from purchasing stock in Valero before the spin-off's completion. Without significant amounts of debt, both Valero and Corner Stores appear well-positioned for the future. The deal is expected to close by the end of July of 2013. If all goes well, it will produce ample returns in the months and years that follow.

 


mthiessen has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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