Exclusive: Marubeni set to cut Gavilon energy arm out of takeover

TOKYO Fri Jun 7, 2013 4:58pm EDT

A logo of Japanese trading house Marubeni Corp is seen on the company's headquarters in Tokyo May 29, 2012. REUTERS/Yuriko Nakao

A logo of Japanese trading house Marubeni Corp is seen on the company's headquarters in Tokyo May 29, 2012.

Credit: Reuters/Yuriko Nakao

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TOKYO (Reuters) - Japanese trading house Marubeni Corp (8002.T) is in advanced talks to cut Gavilon's energy business out of its planned takeover of the U.S. commodity merchant, two sources with direct knowledge of the deal said on Friday.

The move comes as Marubeni works to finalize a $5.6 billion acquisition, including debt, of Gavilon and its core agriculture business in a deal that would propel it into the top ranks of global grain traders and allow it to tap rising Chinese demand.

But sources say the Japanese firm has little interest in taking on Gavilon's mid-sized energy operation, which is focused on oil, gas, and renewable fuels.

"The interest was always in the grains, not the oil," one source with direct knowledge of the Gavilon deal said, speaking on condition of anonymity. The talks could conclude as early as next week, one source said.

Gavilon's energy business could now join a list of mid-sized energy traders that are up for sale, including HETCO, the trading arm of oil firm Hess Corp (HES.N). Morgan Stanley (MS.N) has also looked at selling all or part of its energy-focused commodity division in the past year.

A Marubeni official declined to comment when asked about the plan to split the U.S. company. A spokesman for Gavilon in New York also declined to comment.

Omaha, Nebraska-based Gavilon's shareholders include investor George Soros, Dwight Anderson's Ospraie hedge fund, and Egypt's Orascom Construction Industries (OCIC.CA).

BREAKUP

When Japan's fifth-biggest trading house by market value announced the deal last year it said it had no plans to break up Gavilon's operations. The Gavilon transaction was originally valued at $3.6 billion, plus $2 billion in debt.

Yet market participants had speculated the company could offload an energy business not central to its plans. China's watchdog conditionally approved the takeover in late April following a lengthy review period that has delayed the closing.

During that time the Gavilon deal has become more costly for the Japanese firm, with the yen losing a fifth of its value against the dollar since the deal was first announced in May 2012.

It is not clear if excluding the energy business from the deal will reduce the final price.

ENERGY OPERATIONS

Gavilon's energy operations are largely centered in the Midwest and on the Gulf Coast, and include 8.5 million barrels of crude oil storage capacity, including more than 4 million at Cushing, Oklahoma, the delivery point for the benchmark U.S. crude oil futures contract.

It also has facilities that can hold more than 10 billion cubic feet of natural gas.

Those facilities could be attractive to rival traders or private equity firms looking to grab a slice of the North American energy boom, though total energy sales reported by Gavilon made up just over 2 percent of the firm's $17.85 billion in annual sales in 2011.

For Marubeni, the company already has experience trading oil and natural gas in the United States through its Mieco subsidiary, headquartered in Long Beach, California. It also produces oil and gas in the United States, including offshore projects in the Gulf of Mexico and operations in the Eagle Ford shale fields in Texas.

Mieco focuses on trading gasoline and diesel and other refined oil products in the United States. Part of its business concentrates on the Pacific Rim, importing fuels for Alaska and the Pacific Northwest from Canada and South Korea, according to data from the U.S. Energy Information Administration.

In April, the Department of Energy also authorized it to export and import natural gas to and from Canada.

In 2012 Mieco ranked 53rd in volume of natural gas sales in the United States out of some 480 companies that reported sales to the Federal Energy Regulatory Commission (FERC). Gavilon was number 31 on that list.

(Additional reporting by Aaron Sheldrick in Tokyo, David Sheppard, Jeanine Prezioso and Cezary Podkul in New York; Editing by Jason Neely, Jim Marshall and Marguerita Choy)

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