3 Possible Refining Takeover Targets After Marathon-Andeavor Merger

It’s a busy Merger Monday in deal-making land and a large transaction in the refining industry came to light: Marathon Petroleum’s purchase of Andeavor for $35.6 billion. The combination will create a refining giant in the U.S. with 15% of the country’s capacity and little geographic overlap to upset regulators.

The deal is leading investors to wonder: Who could be next in this consolidating industry?

Andy Lipow has a few ideas. His consulting firm, Houston-based Lipow Oil Associates, has provided market trend analysis to petroleum refiners, terminal operators, product traders and hedge funds for more than three decades.

His top three picks, in order, are CVR Refining, HollyFrontier and Delek US Holdings. They’re all smaller refiners that could help the big industry players expand their reach, as Andeavor is doing for Marathon.

CVR, which counts Carl Icahn as its biggest shareholder, owns refineries in Kansas and Oklahoma along with pipelines, crude oil transports and gathering tank farms and 6.4 million barrels worth of crude oil storage capacity. It has a market capitalization of around $2.5 billion.

Lipow doesn’t see Valero as a buyer of CVR, as there would be overlap between their two portfolios. However, that wouldn’t be the case with PBF Energy, whose refineries are in Delaware, New Jersey, Ohio, Louisiana and California. He also thinks PBF would like to compete with Marathon on a national basis and an acquisition of CVR would help it do that.

HollyFrontier is considerably bigger than CVR, with a market capitalization of $10.9 billion and refineries in Kansas, Oklahoma, New Mexico, Wyoming and Utah. It could find a suitor in the growth-minded PBF, but it could also be buyer of CVR, which would make it a stronger Midwest player, Lipow said.

Finally, there’s Delek, which has a market capitalization of $4 billion. It has refineries near West Texas’ and New Mexico’s Permian Basin. The area has become known as bottleneck central with all the new oil supplies coming on line, leading to lower prices – and better margins – for Delek.

Earlier this month Goldman Sachs cited Delek as a potential takeover target, building a 15% probability of M&A into its $50 per share valuation for the company. It could be scooped up by PBF or HollyFrontier.

There are also several refineries on the block that could be picked up by one of these players, Lipow noted, including those by Petrobras (in Pasadena, Texas, which some think could fetch $500 million), Royal Dutch Shell (in Martinez, California) and Citgo (it has facilities in Texas, Louisiana and Illinois).

The one company that Lipow doesn’t think will participate in any refinery M&A is Exxon Mobil, which has said it wants to expand its refinery in Beaumont, Texas, to handle increasing production from the Permian. Delek would just be too small, he says.

PPA Trumps Just Born’s NLRA Right To Unilaterally Implement Pension Proposal

Seyfarth Shaw LLP – Ronald J. Kramer

USA April 30 2018

Seyfarth Synopsis: While an employer can bargain to impasse and exit a critical status multiemployer pension fund, under the Pension Protection Act it cannot bargain to impasse and implement a proposal that would have it remain in the fund, but under different terms than the rehabilitation plan schedule the parties had previously adopted.

In a case of first impression, the Fourth Circuit held that the Pension Protection Act’s (“PPA”) obligation on bargaining parties to continue to follow a multiemployer pension fund’s rehabilitation plan schedule trumps an employer’s right, upon lawful impasse, to unilaterally implement a proposal to move new hires to a 401(k) plan. Bakery & Confectionary Union & Industry International Pension Fund v. Just Born II, Inc., Case No. 17-1369 (4th Cir., decided April 26, 2018).

Just Born, the maker of Peeps, participated in the Bakery & Confectionary Union & Industry International Pension Fund (“Pension Fund”). The Pension Fund is in critical and declining status, and had adopted a rehabilitation plan under the PPA which included a preferred schedule adopted by the Company and its Union pursuant to which Just Born was required to contribute hourly for every bargaining unit employee.

The Company proposed during its 2015 union negotiations that it remain in the Pension Fund for existing employees, but move new hires to a 401(k) plan. The parties bargained to impasse, and the Company implemented its pension proposal. The Pension Fund sued. The Pension Fund relied on a PPA provision (as amended by the Multiemployer Pension Reform Act), 29 U.S.C. § 1085(e)(3)(C)(ii) (“the “Provision”), that the bargaining parties to an expired contract remain obligated to contribute under the rehabilitation plan schedule, which under the Pension Fund’s schedule included all employees, until such time as they reached an agreement. Indeed, the Provision expressly provides that if the parties cannot reach an agreement within 180 days after contract expiration, the Pension Fund must apply the schedule, as updated, upon which the parties had previously agreed.

The Fourth Circuit ruled for the Pension Fund. In addition to rejecting various affirmative defenses, the Court rejected the Company’s claim that it ceased being a “bargaining party” governed by the Provision once it reached a lawful impasse because it was no longer a party to an operative collective bargaining agreement. The Court found that a plain reading of the Provision makes clear that a contract’s expiration cannot alter the employer’s status as a bargaining party. Indeed, the Provision only applies to parties whose contracts have expired.

The Court further rejected the Company’s Hotel California argument that such an interpretation would mean that once an employer found itself in a critical status plan it would never be able to exit. The Company argued that Trustees of the Local 138 Pension Trust Fund v. F.W. Honerkamp Co., 692 F.3d 127 (2d Cir. 2012), which upheld an employer’s right to bargain to impasse and implement a proposal to exit a critical status fund, gave it the Company the right to implement its proposal. The Court distinguished Honerkamp, for it did not provide that an employer could implement a proposal to remain in the fund under different rules than provided for in the rehabilitation plan.

Last but not least, the Company argued that the Pension Fund’s interpretation undermined the Company’s right under the National Labor Relations Act (“NLRA”) to implement its last, best proposal upon impasse. The Court disagreed, noting that although the right to implement a final offer applies to the Company’s bargaining rights and obligations, the Company’s statutory obligations under the PPA are separate and independent from its rights and obligations under the NLRA. Just Born was free to bargain to impasse and implement its proposals provided, however, the Company could not implement proposals contrary to the PPA.

Just Born sets an important limit on an employer’s right to bargain to impasse over its participation in a critical or endangered status fund. An employer is free under the PPA to bargain out and pay the resulting withdrawal liability, even if it has to reach lawful impasse and unilaterally implement. What it cannot do, according to Just Born, is to remain in the fund but negotiate to impasse and implement conditions on participation different from the rehabilitation or funding improvement plan schedule to which it is a party. Just Born does not address whether an employer can negotiate to impasse and implement a different schedule provided for in a rehabilitation plan — although it is doubtful since there would still be no agreement as required by the Provision. Nor does it provide that the bargaining parties can just agree to terms different from a rehabilitation plan schedule. While a fund may agree to different schedules, it is under no obligation to do so. Employers beware.

Changes in Circumstances Counsel against NLRB Issuing Bargaining Order, Court Concludes

Article By: Daniel G. Rosenthal Howard M. Bloom

A bargaining order is an extreme form of relief and should not be issued without careful consideration of whether changed circumstances render such an order inappropriate, the U.S. Court of Appeals for the Second Circuit, in New York, has explained, remanding an unfair labor practice case to the Board. Novelis Corp. v. NLRB, 2018 U.S. App. LEXIS 6462; 201 L.R.R.M. 3523 (2d Cir. Mar. 15, 2018).

In Novelis, after a majority of employees had signed union recognition cards, and before the election, the company changed benefits to discourage employees from voting for the union, threatened employees with plant closure, and unlawfully demoted a union supporter. The company won the election conducted by the National Labor Relations Board. The union filed multiple unfair labor practice charges against the company, and the Administrative Law Judge found the company had committed an unfair labor practice. Two years after the election, the NLRB adopted the ALJ’s findings and issued a “bargaining order” requiring the company to bargain with the union despite the companies having won the election. The Board refused to consider the passage of time and changed circumstances since the election.

The Second Circuit upheld the Board’s finding on the unfair labor practice charges, but disagreed with the issuance of the bargaining order. The Court noted that “a bargaining order is a rare remedy warranted only when it is clearly established that traditional remedies cannot eliminate the effects of the employer’s past unfair labor practices.” Such a remedy is “appropriate only when traditional remedies, such as a secret ballot rerun of an election, do not suffice.” The Court further noted “the superiority of, and [its] preference for, secret ballot elections over bargaining orders.” Consequently, the Court said, the Board “carries a heavy burden to justify a bargaining order in lieu of a second election.”

The Second Circuit concluded the Board:

• Ignored the fact that Novelis had taken meaningful steps to remedy the unfair labor practices.
• Did not account for the passage of time, which casts doubt on the employees’ union support expressed years ago by authorization cards.
• Failed to take into account significant employee turnover since the election.
• Bargaining orders are not often issued by the NLRB, but when they are, their issuance must be justified. Although the employer here was able to avoid the issuance of a bargaining order, all of the factors on which the Court based its decision may not be present in other cases. Employers are permitted to aggressively communicate with their employees in the face of a union organizing campaign, but they should consult with experienced counsel to reduce the likelihood a bargaining order will be issued.

Ultimately, the Court concluded that there was no reason to believe a fair rerun election could not be held.

Bargaining orders are not often issued by the NLRB, but when they are, their issuance must be justified. Although the employer here was able to avoid the issuance of a bargaining order, all of the factors on which the Court based its decision may not be present in other cases. Employers are permitted to aggressively communicate with their employees in the face of a union organizing campaign, but they should consult with experienced counsel to reduce the likelihood a bargaining order will be issued.

Jackson Lewis P.C. © 2018