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Icahn's CVR Energy picks up big stake of Delek US with eye on combining operations

Highlights

Icahn buys 14.86% stake in refiner Delek, eyes combination with CVR

Delek US announces shareholders right agreement

New York — Carl Icahn bought a 14.86% stake in Texas-based refinery Delek US and said in his filing with the US Securities and Exchange Commission that he intends for CVR Energy, another refiner in which he holds a stake, to have discussions with Delek regarding potential transactions.

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Delek US owns four refineries with 302,000 b/d of refining capacity. The facilities are located in the Permian Basin, East Texas, Louisiana and Arkansas. CVR Energy owns two – one in Kansas and one in Oklahoma – with a total of 206,500 b/d of capacity.

The combination of the two would create a stronger, more geographically diverse inland refining presence with even better access to price-advantaged crude in Cushing, Oklahoma, as well as the Permian where Delek owns the Big Spring refinery, as well as Canada.

"In an environment when forward cracks are imploding, this is the best news [Delek] shareholders could have gotten, in our opinion," said Manav Gupta, Credit Suisse analyst, in a research note.

CVR has access to key crude takeaway pipelines, and good access to shale and Canadian crude pipelines. It also has a crude gathering system with access to over 250,000 b/d of regional crude. Fourth quarter of 2019 flows from local SCOOP/STACK gathering systems grew by 45% year over year, it said.

Delek is a larger company and much of its logistical assets are held in its master limited partnership – Delek Logistics. This includes 10 terminals, 1 million barrels of storage capacity and interests in several joint venture crude pipelines – the RIO, Caddo and Red River assets.

Delek US has a retail presence with about 252 outlets in the southwest US as well as a West Texas wholesale marketing business. Delek US also produces about 40 million gallons of biodiesel annually at three facilities.

In addition, Delek US holds a 15% stake in the Wink to Webster crude pipeline that will run from the Permian to the US Gulf Coast. Its partners in the 1 million b/d pipeline include ExxonMobil, Plains All American and Lotus Midstream.

Delek's poison pill

Icahn's Delek stake is currently valued at $125.8 million, but Delek does not think the price reflects the value of the company. Icahn has a 71% stake in CVI, the parent company of CVR Energy.

Delek countered with a "limited duration shareholder rights agreement" citing the reduced value of its shares due to the current low commodity prices due to the coronavirus outbreak and other market disruptions. The agreement gives a dividend distribution of one right on each outstanding share of Delek common stock payable to shareholders of record on March 30, 2020.

"We appreciate CVR's investment in our company and we look forward to having a discussion about potential opportunities," said Delek US CEO Uzi Yemin in a statement Friday.

"Given the fact that Delek's current share price does not reflect the company's intrinsic long-term value due to the extreme dislocation caused by the COVID-19 crisis and low commodity prices, we have no choice but to take action to prevent a creeping change of control without a premium and on terms that would not deliver sufficient value for all shareholders," he added.

Icahn began buying Delek shares in early February 2020 at $27.96/share and "accelerated buying once the stock dipped below $10/share," Gupta wrote.