Refiners Holly, Frontier seek to merge in all-stock deal to create $7B single entity

Source: Holly Corporation

Holly Corporation (NYSE: HOC) (Holly) and Frontier Oil Corporation (NYSE: FTO) (Frontier) have announced that the Boards of Directors of both companies have unanimously approved a definitive merger agreement under which the companies will combine in an all-stock merger of equals transaction. Based on the closing market prices for the shares of both companies on Friday, February 18, 2011, and their debt levels as of December 31, 2010, the new company would have an enterprise value of $7 billion.

The new company, which will be named HollyFrontier Corporation, will have a well-positioned refining asset base, enhanced growth opportunities and one of the best balance sheets in the industry. The combination of Frontier and Holly will create the most profitable (on a per barrel basis) independent refiner in the U.S., serving the niche Mid-Continent, Rocky Mountain and Southwest refining markets and will have access to growing regional domestic and Canadian crude oil supplies.

The combined company will be headquartered in Dallas, Texas, the location of Holly’s current headquarters. Mike Jennings, current Chairman, President and CEO of Frontier, will serve as President and Chief Executive Officer of the combined company. Matt Clifton, current Holly Chairman and CEO, will serve as Executive Chairman of the combined company. Following the closing of the transaction, the Board of Directors of the new company will consist of the seven current Frontier Board members and the seven current members of the Holly Board.

Under the terms of the agreement, Frontier shareholders will receive 0.4811 Holly shares for each share of Frontier common stock. Upon closing of the transaction, Holly shareholders are expected to own approximately 51 percent and Frontier shareholders are expected to own approximately 49 percent of the combined company. The transaction is structured to be tax-free to the shareholders of both companies.

Frontier plans to pay a $0.28 per share special dividend on March 21, 2011 to all Frontier shareholders of record on March 7, 2011. Frontier also plans to reinstate its regular quarterly dividend of $0.06 per share, which will also be payable on March 21, 2011 to shareholders of record on March 7, 2011. Holly expects to continue to pay dividends at the current level through the closing of the merger. Holly pays an annual dividend of $0.60 per share. Following the completion of the merger, it is expected that the HollyFrontier Board of Directors will adopt a dividend policy appropriate to build long-term shareholder value.

In a joint statement, Matt Clifton, Holly’s Chairman and Chief Executive Officer, and Mike Jennings, Frontier’s Chairman, President and Chief Executive Officer said, “Frontier and Holly are two of the most profitable, publicly traded independent refining companies; together we will be one of the largest independent refiners in the U.S. We expect this transaction to deliver meaningful value to our shareholders, as it provides significant growth potential via a combined company that is better positioned in an increasingly competitive industry. This strategic combination of Holly and Frontier increases our diversity of assets and geographic coverage, provides for a strong balance sheet and brings together two of the strongest management teams and the most talented employees in the industry. We are excited to move forward with this transaction and to realize the potential inherent in this combination to deliver significantly higher value for the shareholders of both companies.”

Excellent Strategic Fit Supports Long-Term Value Creation:

• Increased Scale, Asset Diversity and Competitiveness: The combined company’s expanded footprint will allow for an increase in refining capacity in fast growing, traditionally high demand areas while maintaining significant exposure to the growing supply of lower cost domestic and Canadian crude oil. The HollyFrontier combination strengthens both companies’ strategic position by diversifying revenues, expanding infrastructure and increasing the scale of its assets. The new company will have a refining capacity in excess of 440,000 barrels-per-day (bpd) across five refineries.

• Significant Synergy Opportunities: The transaction is expected to generate value through total annual cost savings of at least $30 million through reduced SG&A expenses and increased operational efficiencies.

• Financial Strength and Flexibility: Frontier and Holly expect the combination to be accretive to Holly’s earnings per share based on analysts’ consensus estimates and excluding one-time expenses related to the merger. The increased scale and diversity of assets, coupled with the combined company’s strong balance sheet, create the possibility for cost-of-capital synergies and a stronger corporate credit profile. In addition, the combined company will be better positioned to take advantage of future strategic opportunities including growth in its logistics and marketing operations facilitated by collaboration with Holly Energy Partners.

The transaction is expected to be completed early in the third quarter of 2011. It is subject to, among other things, approval by both companies’ shareholders and other customary closing conditions, as well as clearance under the Hart-Scott-Rodino Act.

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