HollyFrontier Corp. and Holly Energy Partners L.P. announced they have entered into definitive agreements under which HollyFrontier and HEP will acquire Sinclair Oil Corp. and Sinclair Transportation Co. from The Sinclair Companies.
Under the terms of HollyFrontier’s definitive agreement, HollyFrontier will acquire Sinclair’s branded marketing business and all commercial activities, renewable diesel business and two premier Rocky Mountain-based refineries.
HollyFrontier will form a new parent company, called HF Sinclair Corp., which will replace HollyFrontier as the public company trading on the NYSE.
At the closing, existing shares of HollyFrontier will automatically convert on a one-for-one basis into shares of common stock of HF Sinclair, and HF Sinclair will issue approximately 60.2 million shares of common stock to Sinclair, representing 26.75% of the pro forma equity of HF Sinclair with a transaction value of approximately $1.8 billion based on HollyFrontier’s fully diluted shares of common stock outstanding and closing stock price on July 30, 2021. HollyFrontier expects to seek the approval of its stockholders under applicable rules of the New York Stock Exchange for the issuance of the HF Sinclair shares to Sinclair.
The transaction will transform HollyFrontier by accelerating its growth while increasing scale and diversification; it also allows HollyFrontier to integrate downstream into branded wholesale distribution.
HF Sinclair will drive incremental free cash flow growth through its expanded refining business, integrated distribution network, leading renewable diesel position and growing lubricants and specialties business. The transaction is expected to be accretive to HF Sinclair’s earnings, cash flow and free cash flow within the first full year, and to enable the combined company to increase its commitment to return cash to stockholders.
Upon closing of the transaction, HollyFrontier’s existing senior management team will operate the combined company. Under the agreements, Sinclair will be granted the right to nominate two directors to the HF Sinclair board of directors at the closing. The Sinclair stockholders have also agreed to certain customary lock up, voting and standstill restrictions, as well as customary registration rights, for the HF Sinclair shares to be issued to the stockholders of Sinclair.
The new company will be headquartered in Dallas, Texas, with combined business offices in Salt Lake City, Utah.
“HollyFrontier was formed through a transformational merger that facilitated a decade of significant stockholder returns along with growth and diversification into lubricants and renewables,” said Mike Jennings, CEO of HollyFrontier and HEP. “We believe these transactions with Sinclair represent a similar inflection point, marking the beginning of our next chapter as HF Sinclair.”
Jennings added that, with the addition of Sinclair, the company is adding an integrated marketing business with an iconic brand while building on the strength of its expanded refining network, increasing our scale and accelerating the growth of its renewables business.
“At the same time, this transaction will significantly extend the reach of HEP,” said Jennings. “Strengthened by an integrated network of Sinclair pipelines and storage facilities, HEP will have the scale and incremental earnings power to capture new organic growth opportunities and increase cash returns to unitholders.”
Financial Targets, New Plan to Return Capital
HF Sinclair will focus on maintaining its investment grade balance sheet and delivering significant free cash flow while utilizing a balanced approach to capital investment and cash return to stockholders. As part of its commitment to cash return, HF Sinclair intends to focus on the following strategy:
- Near-term: Reinstate the regular dividend of $0.35/share no later than the second quarter of 2022.
- Mid-term (next 18 months): Return $1 billion of cash to stockholders through regular dividends and share repurchases by the first quarter of 2023.
- Long-term (2023 and beyond): Implement a target payout ratio of 50% of adjusted net income in the form of regular dividends and share repurchases.
HEP’s acquisition of Sinclair’s logistics assets is expected to provide enhanced earnings power, allowing for further deleveraging and incremental cash return to unitholders. For its commitment to cash return, HEP intends to incorporate the following strategy:
- Near-term: Continue to reduce leverage while paying a quarterly distribution of $0.35/unit.
- Mid-term (next 18 months): Reduce leverage ratio to 3.5 times EBITDA while targeting a distribution coverage ratio of 1.5 times. HEP also expects to increase its quarterly distribution with the option of repurchasing units with excess free cash flow.
- Long-term (2023 and beyond): Maintain leverage ratio below 3.0 times EBITDA while targeting a distribution coverage ratio of 1.3 times. HEP expects to continue increasing the quarterly distribution with the option of repurchasing units with excess free cash flow.