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HollyFrontier: Sonneborn acquisition will not constrain it from pursuing others

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HollyFrontier: Sonneborn acquisition will not constrain it from pursuing others

During a Nov. 13 conference call discussing HollyFrontier Corp.'s $655 million acquisition of specialty products producer and marketer Sonneborn Cooperatief U.A., HollyFrontier executives would not rule out future acquisitions during the integration that will follow.

But the all-cash deal reduces the company's cash reserves, and for the time being, executives are reluctant to take on more debt.

Instead, executives said they would continue to target between $1 billion and $1.2 billion in share repurchases annually.

"We've said that all things being equal, $500 million of cash on the balance sheet is the correct number. … We're there right now. We're funded as far as we're concerned. So excess cash above that, we'll return to shareholders," HollyFrontier Executive Vice President and CFO Richard Voliva said. "Where we're at right now is we feel comfortable with our debt profile today. We intend and expect to maintain our investment grade rating. As we add more stable businesses and cash flows it gives us more flexibility going forward. But right now, there's no intention to add additional debt."

Nevertheless, HollyFrontier CEO, President and Director George Damiris said the company would remain opportunistic.

"I don't view management and integration constraining our ability or desire to do future acquisitions. … I think we can quickly and efficiently integrate [Sonneborn]," Damiris said. "Our pace of future acquisitions will be dictated by what we see in the marketplace. If we see something that's attractive like Sonneborn, or PCLI, I don't think we'll be afraid to pull the trigger and do another deal while we're integrating Sonneborn into the [HollyFrontier] family."

Damiris said the acquisition falls in-line with HollyFrontier's strategy of bolting on so-called "rack forward" businesses, which purchase rather than produce base oils for blending and packaging and handle the marketing, distribution and sales of lubricants and specialty products.

"This business is highly fragmented. It's a lot of small private companies, a lot of private equity. It's such a large global market that we see lots of opportunities across all of these segments: finished lubricants, specialty products, waxes, white oils, greases, with diverse customer bases as well, [such as] personal care [and] pharmaceuticals. … So that's what we like about this space: a diversity of products and a diversity of end markets that contribute the EBITDA margin profile we talked about," Damiris said.

HollyFrontier executives said they expect the acquisition to be immediately accretive to earnings and cash flow per share as it produces approximately $85 million of annual EBITDA, including $20 million in annual synergies.

"The EBITDA is very stable here. I think that speaks to the nature of the end markets we're talking about, … things that are relatively stable and recession-proof," Damiris said.

Voliva said the $5 million in synergies related to selling, general and administrative expenses would come quickest, while $3 million in logistics synergies related to transportation and blending cost reductions would take between 12 and 18 months to realize. Voliva expects $12 million in production optimization synergies would take the longest to fully realize at approximately 24 months.

Despite the acquisition's expanding HollyFrontier's footprint into Europe, Damiris said HollyFrontier intends to remain focused on the North American market: "This is a logical extension of our production capability, but it's not our primary focus to broaden into Europe and Asia. Never say never. When the right opportunities come along, we'll pursue them. But it's not the major thrust of our growth initiative to look for international opportunities."