Ultramar to Buy Gas Retailer for $1.96 Billion

From Bloomberg Business News

Ultramar Corp. said Monday that it will buy Diamond Shamrock Inc. for about $1.96 billion in stock and assumed debt in a deal that would give the two a commanding share of the retail gasoline market in the Southwest.

Based on Friday's closing price of $28.50 for Ultramar stock, the transaction would be worth about $29.07 a share for Diamond Shamrock investors, or a total of $956 million. Ultramar would also assume about $1 billion in debt.

Ultramar and Diamond Shamrock expect to cut $75 million in costs by combining operations and creating the third-largest U.S. gasoline refining and marketing company.

"The two companies together certainly will be able to exploit all of the opportunities in the high-growth areas of the Southwest," said Ann Kohler, an analyst with UBS Securities.

San Antonio-based Diamond Shamrock became the largest gasoline retailer in Texas with its purchase of 660 Stop 'N Go convenience stores last year. Ultramar is California's second-largest gas retailer.

The companies also have refineries in California and Texas that are well positioned to serve the growing Arizona market, for which Diamond Shamrock has aggressive expansion plans.

"We have the capacity, we have the distribution facilities in place, so this gives us a tremendous opportunity to capture the growth in those markets," Ultramar Chairman Jean Gaulin said.

Greenwich, Conn.-based Ultramar operates refineries in the Wilmington area of Los Angeles and in Quebec with a combined capacity of 250,000 barrels a day. The company also sells gasoline under the Ultramar, Beacon and Sergaz brands through 360 stations in California and 1,400 locations in Eastern Canada. It also is one of the largest providers of home heating oil in North America.

Ultramar said it will put on hold plans to spend $50 million expanding its California retail chain.

Ultramar shares rose $1.375 to $29.875; Diamond Shamrock shares climbed 37.5 cents to $30.625.

The offer would not represent an immediate gain for Diamond Shamrock stockholders, who saw their shares rise more than 9% to $31.50 last week on takeover speculation. Their dividends would double, however.

Ultramar and Diamond Shamrock called the transaction a true merger of "equals" in which Ultramar will move its headquarters to San Antonio and shift all its U.S. gas stations to the Diamond Shamrock name.

Diamond Shamrock Chairman Roger Hemminghaus would become chairman and chief executive of the new company, Ultramar Diamond Shamrock. Gaulin would serve as vice chairman, president and chief operating officer until the end of 1998, when Hemminghaus would retire as chief executive. Gaulin would assume the chairman's post within three years after that, the companies said.

Ultramar Diamond Shamrock would have more than 4,400 retail outlets in the U.S. and Canada and more than $8 billion a year in revenue, compared with about $10 billion for rival Tosco Corp., which earlier this year bought the 2,500-store Circle K convenience-store chain. The combined companies would generate about $25 million in recurring cost savings the first year and $50 million more the next as they eliminate about 200 jobs and Ultramar scales back some expansion plans. The companies expect to report about $67 million in transaction and transition costs.

Diamond Shamrock has two Texas refineries with combined capacity of 225,000 barrels a day. It sells gas and convenience-store goods through about 2,700 Corner Store, Stop 'N Go and Diamond Shamrock stores in nine states.

Standard & Poor's Corp. put Ultramar and Diamond Shamrock debt ratings on its CreditWatch with positive implications, saying the firm should have stronger earnings because of geographical diversity in the refining business.

The transaction, still subject to shareholder approval, is expected to close by year-end.

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