* Marathon unit Speedway to buy the business
* Deal to give Speedway gas stations, East Coast stores
* Marathon shares up slightly, Hess up 1.8 percent
(Updates share price, adds details, paragraphs 2-6, 14)
By Anna Driver and Sayantani Ghosh
HOUSTON/BANGALORE May 22 Refiner Marathon
Petroleum Corp said it would buy oil and natural gas
company Hess Corp's retail and transport business for
$2.87 billion, expanding its network of gas stations and
convenience stores along the U.S. East Coast.
While Hess has been shedding downstream assets to focus on
more profitable shale drilling, the deal offers Marathon a
buffer against the volatile refining business by boosting
exposure to more stable cash flows from retail. It also provides
a guaranteed market for the company's fuel, Marathon's Chief
Executive Officer Gary Heminger said on a conference call on
Marathon Petroleum sells gasoline, food and drinks mainly
through 1,480 Speedway convenience stores it owns and operates
in nine states in the U.S. Midwest. The deal will create the
largest company-owned and operated convenience store chain in
the United States, measured by revenue.
Marathon also sells its fuel at 5,200 independent retail
outlets. Fuel from many refiners is sold by other brands.
Hess, which operates 1,256 stores in 16 states along the
East Coast and Southeast, will use the sale proceeds for
additional share buybacks and has increased its existing
repurchase program to $6.5 billion from $4 billion, it said.
At the behest of activist investors who saw the stock as
undervalued, Hess has been shedding oil, gas and other assets it
does not consider core to its U.S. exploration and production
business. The company's shares have climbed to a five-year high.
In January Hess filed with regulators to spin off its retail
operations, but analysts said an outright sale generates much
more upfront cash.
Marathon said it would pay $2.37 billion in cash, plus an
estimated $230 million in working capital and $274 million for
capital leases. The combined business was expected to report
adjusted 2013 revenue of more than $27 billion.
The deal's higher-than-expected valuation may give investors
pause, Roger Read, analyst at Wells Fargo said in a client note.
Under the agreement, Marathon has three years to convert the
Hess stores to the Speedway brand, a process that is expected to
cost a total of $410 million, the company said.
The addition of the Hess gas stations expands the market for
gasoline produced at Marathon's refineries.
"With this significant geographic expansion, we will be able
to further leverage our integrated refining and transportation
logistics operations, providing an outlet for an incremental
200,000 bpd of assured sales from our refining system," Heminger
said in a statement.
Barclays Capital acted as financial adviser to Marathon in
the deal that is expected to close late in the third quarter.
Shares of Marathon rose 0.6 percent to $88.28 and shares of
Hess Corp climbed nearly 1.6 percent, or $1.59, to $90.89 in
midday New York Stock Exchange trading.
(Reporting by Anna Driver in Houston and Sayantani Ghosh in
Bangalore; Editing by Don Sebastian, Maju Samuel, Terry Wade and
Sofina Mirza-Reid and David Gregorio)