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Marathon Petroleum Inks $21B Speedway Deal; RBC Capital Approves

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Marathon Petroleum Corp (MPC) has announced that it has agreed to sell its Speedway business for $21 billion in cash to 7-Eleven, Inc, a subsidiary of Seven & i Holdings Co., Ltd. The transaction is expected to close in the first quarter of 2021, subject to closing conditions and regulatory approvals.

“Our announcement crystalizes the significant value of the Speedway business, creates certainty around value realization and delivers on our commitment to unlock the value of our assets” commented Marathon’s CEO Michael Hennigan.

“At the same time, the establishment of a long-term strategic relationship with 7-Eleven creates opportunities to improve our commercial performance” he added.

Indeed, according to the statement the strategic rationale behind the transaction is three-fold 1) it creates certain value for MPC shareholders; 2) after-tax cash proceeds of $16.5 billion can be used to repay debt, protect MPC’s credit profile and return capital to shareholders; and 3) MPC will have a 15-year fuel supply agreement with 7-Eleven for 7.7 billion gallons per year of gasoline, the same as Speedway’s 2019 sales volumes.

MPC also expects additional opportunities to supply 7-Eleven to emerge over time as 7-Eleven adds new locations in both the U.S. and Canada.

The transaction has been unanimously approved by the boards of directors of both companies.

Following the announcement, RBC Capital analyst Brad Heffern stated “We think this is a positive for the stock.” Based on his conversations with investors, valuation expectations had moved down into the high teens range, so he believes that the price is a surprise to the upside.

However, there is a larger tax hit than Heffern was expecting- although he sees the long-term fuel supply agreement as a positive, as well as the potential future opportunities with 7-Eleven. “The biggest question for us is around use of proceeds, as $16.5 billion would represent a very large amount of delevering and/or shareholder returns” the analyst writes.

He has a buy rating on the stock with a $43 price target, for upside potential of 13%. According to Heffern, new CEO Michael Hennigan is focusing on improvements in the right areas, consistent with past investor concerns around cost structure, returns, and commercial performance.

Shares in Marathon Petroleum have plunged 37% year-to-date, but analysts have a bullish Strong Buy consensus on the stock’s outlook. That’s with an average analyst price target of $47 (23% upside potential). (See MPC stock analysis on TipRanks).

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