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Valero Plans to Buy Ultramar

Energy: Refiners' proposed $4-billion deal could help reduce gasoline prices in California.


HOUSTON — Valero Energy Corp. said Monday it plans to buy Ultramar Diamond Shamrock Corp. for $4 billion in cash and stock in a deal that would make Valero the second-biggest U.S. oil refiner and put it in a position to challenge mighty Exxon Mobil Corp. for the top slot.

The proposed deal between the two San Antonio-based companies is the latest in a series of big-money mergers and acquisitions that has changed the landscape of the U.S. and global petroleum industry in recent years. Its announcement coincided with news that U.S. retail gasoline prices hit an all-time high Monday.

Valero Chairman and Chief Executive Bill Greehey said he expected the acquisition to help lower gasoline prices in California, where Valero owns a refinery in the Northern California town of Benicia that is capable of refining 129,500 barrels of crude oil a day. Ultramar Diamond Shamrock owns a 68,000-barrel-a-day refinery in Wilmington and a 156,000-barrel-a-day refinery in Martinez, near San Francisco.

"I think we're going to create more competition in California and we're going to reduce the cost of gasoline to the consumer," he told a meeting of analysts in New York.

This would be achieved, he said, through savings realized by bulk-buying imported crude oil for the three refineries.

Other West Coast refiners would also benefit, he added, because increased imports would help lower the cost of relatively expensive Alaskan crude oil, which is widely used in California.

Greehey said he had already discussed the planned acquisition with California Atty. Gen. Bill Lockyer, who he said was "not negative at all" about the deal as long as independent gasoline dealers were assured of a reliable source of supplies.

The transaction has been approved by both companies' boards but requires regulatory approval. Valero said it expects to close the acquisition by the end of October.

Ultramar shareholders could opt to receive 1.228 Valero shares or $55 cash for each Ultramar share.

Valero said it would pay roughly half of the total purchase amount in cash and half in shares. The offer represents a premium of about 30% for Ultramar's stock, it said, based on a 10-day average price for the period ended April 26.

On the New York Stock Exchange Valero shares closed $2.77, or 6%, lower at $42.70, and Ultramar shares closed $7.79 higher at $50.50, a gain of 18%.

Valero, which would assume about $2 billion of Ultramar debt, said it expects to realize more than $200 million a year in cost savings by combining the two companies and that the acquisition would boost its earnings and cash flow.

Valero stockholders would own about 60% of the combined company, and Ultramar stockholders would own the rest. Greehey would continue to head Valero, and Ultramar CEO Jean Gaulin would retire when the deal closes.

The combined company would have 23,000 employees in the United States and Canada and annual revenue of $32 billion.

Greehey said no layoffs were planned in connection with the acquisition.

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