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Activist investor makes case to split Marathon Petroleum into 3 businesses

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Activist investor makes case to split Marathon Petroleum into 3 businesses

An activist investor that owns about 2.5% of U.S. refiner Marathon Petroleum Corp. sent the company's board of directors a letter Sept. 25 calling for the integrated refiner to be split into three independent companies, outlining $39 billion in value such a move would unlock.

In the letter, Elliott Management Corp. alleged that Marathon's management and board had failed to deliver on prior "promises" to evaluate such a plan "in good faith" and instead pursued a $23.3 billion deal creating America's largest integrated refiner.

Marathon closed on its acquisition of Andeavor in October 2018. While investors have been frustrated by Marathon's performance since the deal closed, the company remains a top pick among analysts attracted in part by the deal's $1.4 billion in annual run-rate synergies.

Elliott said "there is little to no 'synergy' value to retaining the three business in Marathon" and "modest costs of separation would pale in comparison to the billions of value that would be unlocked as a result of the transactions."

To unlock the value in Marathon's conglomerate structure, Elliott believes that the company must separate into three independent entities, "which will create three strong, independent companies — each a leader in its sector," Elliott said in a statement.

The fund manager estimated the spinoffs would "unlock more than $22 billion in value for shareholders with no change in operating assumptions [and] and incremental $17 billion in value through achieving the operating full potential of Marathon's world-class asset base" for "a total potential upside of over 100%."

Elliott said that as independent businesses, Marathon's Speedway retail segment would become the largest U.S.-listed convenience store operator, its master limited partnership subsidiary MPLX LP would be a "top-five US midstream operator by enterprise value," and Marathon's refining segment would be the largest independent merchant refiner in the U.S. by capacity.

Elliott said it has prodded Marathon Petroleum for the changes since late 2016 but accepted a compromise in which Marathon agreed to the immediate simplification of its midstream business and a strategic review of Marathon's retail business.

"We viewed it as an acceptable outcome at the time based on assurances that the company would evaluate a separation in good faith," Elliott said in the letter. Marathon decided against spinning off the Speedway business in September 2017, outlining its justification on a call with investors.

"While the published materials went to great lengths to argue the challenges of separation, we found the analysis presented by the company to be deeply flawed and inconsistent with the company's commitment to pursue a 'thorough review,'" Elliott said. "It has now become clear that while the company assured shareholders that it was pursuing a full review of the Speedway business, it had a different agenda entirely."

The fund manager alleged that while Marathon's management team was supposed to be giving a Speedway separation a "full and thorough review," the company was already "far along in discussions to acquire Andeavor, another integrated refining conglomerate."

"This disingenuous set of actions has seriously undermined the company's credibility with shareholders, who now have reason to doubt that promises made by the board and management will in fact be kept," Elliott said.

In a Sept. 25 statement, Marathon Petroleum said it will "thoroughly evaluate Elliott's proposal," adding that it is in regular communication with its shareholders and "welcomes constructive input related to enhancing shareholder value." Marathon noted that since becoming an independent company in 2011, its stock has generated a total shareholder return of 254%, exceeding the S&P 500's total return of 174%. Over the same period, Marathon said it delivered more than $20 billion through dividends and share repurchases.

In August, Marathon executives said they were exploring divesting "nonstrategic" assets as part of a long-term portfolio optimization. Marathon Petroleum Chairman and CEO Gary Heminger said Aug. 1 that such a review has been part of its strategy since before the Andeavor acquisition, but it involved assets across the company's portfolio, "not just one segment versus the other."