Kirk Kerkorian's Tracinda Corp. plans a $1.4-billion tender offer to acquire a 16% stake in Tesoro Corp., a U.S. refiner whose profit jumped tenfold in the last four years as gasoline demand and prices climbed.
The offer will be for 21.9 million shares of San Antonio-based Tesoro at $64 each, Los Angeles-based Tracinda said Friday. The price is 12% higher than Thursday's close.
Kerkorian, a 90-year-old billionaire, would become Tesoro's largest shareholder, with a 20% stake. Analysts said the offer was a vote of confidence in Tesoro's management, led by Chief Executive Bruce Smith, rather than a prelude to a takeover.
"This offer is indicative of the view that among the independent refiners, Tesoro's management team has been executing very well and that the fundamentals of the refining industry in the U.S. remain strong," said Ann Kohler, an analyst at Caris & Co. "Clearly, Mr. Kerkorian views this company as undervalued, and he expects it to go higher than the $64 price in the future."
Tesoro shares rose $7.28, or 13%, to $64.48. The gain was Tesoro's biggest since December 2002.
Before Friday, the shares had jumped 74% this year -- the biggest gain among members of the Standard & Poor's super-composite oil and gas refining and marketing index
Kerkorian is offering a premium price because "it's hard to be quiet when you're buying this many shares," said Daniel Scalzi, chief executive at research firm Matrix USA in New York. "What he's saying by paying this premium is, 'Let's get this over with, and I'll pay up for it.' "
Kerkorian probably would push Tesoro to funnel more of its cash flow into dividends and share buybacks, especially after debt from Tesoro's May acquisition of a Royal Dutch Shell refinery near Los Angeles is paid off, said Roger Read, an analyst at investment bank Natixis Bleichroeder Inc. in Houston.
"This looks to be more on the harvest side than the growth side," Read said. "I don't think this is about trying to build a refining business now when there's a lot of private equity out there chasing assets that have increased."
Tesoro owns seven refineries that can process 669,000 barrels of oil a day into gasoline, diesel, jet fuel and kerosene. The two biggest plants are in California, the largest U.S. motor-fuel market and home to the nation's highest gasoline prices outside of Hawaii, where Tesoro also has a refinery.
Tesoro has the highest free cash flow per share among independent U.S. refiners.