Marathon Petroleum Corp., the second-largest U.S. oil refiner, has agreed to acquire Andeavor, the fifth largest, that will catapult the merged company on top. The USD 23.3 billion deal, which is expected to close in the second half of 2018, will create the largest U.S. oil refiner with a combined oil refining capacity of 2.9 million barrels per calendar day (bpcd) in the United States, overtaking Valero Energy Corp.

Marathon Petroleum is focused on the Midwest and Gulf Coast, while Andeavor is focused on the western United States. The combined entity, which will use the name Marathon, expects to be well positioned to capitalize on upcoming IMO (International Maritime Organization) regulations in 2020 to reduce pollution from ships. Andeavor’s port assets in California, together with Marathon’s in the U.S. Gulf Coast, will give the merged company the ability to sell lower-sulfur ship fuel.

Marathon Petroleum and Andeavor, formerly Tesoro Corp., announced the definitive merger agreement on 30 April, under which Marathon will acquire all of Andeavor’s outstanding shares, representing a total equity value of USD 23.3 billion and a total enterprise value of USD 35.6 billion, based on Marathon’s April 27, 2018, closing price of USD 81.43.

“This transaction combines two strong, complementary companies to create a leading U.S. refining, marketing, and midstream company, building a platform that is well-positioned for long-term growth and shareholder value creation,” said Gary R. Heminger, Marathon chairman and chief executive officer.

“Each of our operating segments are strengthened through this transaction, as it geographically diversifies our refining portfolio into attractive markets, increases access to advantaged feedstocks, enhances our midstream footprint in the Permian basin, and creates a nationwide retail and marketing portfolio that will substantially improve efficiencies and enhance our ability to serve customers,” Heminger said.

The transaction, which was unanimously approved by the board of directors of both companies, is subject to regulatory and other customary closing conditions, including shareholders’ approvals.

The merged company’s headquarters will be located in Findlay, Ohio, U.S.A. and the combined business will maintain an office in San Antonio, Texas, U.S.A., where Andeavor is currently headquartered.

At closing, Greg Goff, Andeavor chairman and chief executive officer, will join Marathon as executive vice chairman. As executive vice chairman and an executive of Marathon following closing, Goff will provide leadership and be integrally involved in the strategy for the combined company. Goff, along with three other Andeavor directors, will also join the board of directors of Marathon Petroleum.

“With significantly increased scale, a strong platform for our midstream businesses and a leading nationwide retail and marketing distribution portfolio, the combined company presents tremendous value enhancement and growth opportunities for all shareholders,” said Goff.

“This strategic combination provides our shareholders with a premium for their shares and the opportunity to benefit from substantial future value creation at MPC. As the largest refiner by capacity in the U.S., with a best-in-class operating capability and a strong capital structure, the combined company will be exceptionally well positioned to deliver on its synergy and earnings targets. We look forward to working together to deliver on the full potential of this powerful combination.”

Andeavor shareholders will have the option to choose 1.87 shares of Marathon Petroleum stock, or USD 152.27 in cash subject to a proration mechanism that will result in 15% of Andeavor’s fully diluted shares receiving cash consideration. This represents a premium of 24.4% to Andeavor’s closing price on April 27, 2018.

Marathon Petroleum and Andeavor shareholders will own approximately 66% and 34% of the combined company, respectively.

Heminger said he expects the transaction to be “meaningfully accretive” for shareholders, generating approximately USD 1 billion of tangible annual run-rate synergies within the first three years.

“Given the confidence in the robust cash flow expected to be generated by the combined business, our board also authorized an incremental USD 5 billion of share repurchases. As a combined company, we will continue our balanced approach to investing in the business and returning cash to our investors, while maintaining our commitment to an investment-grade credit profile.”

Marathon Petroleum currently has a crude oil refining capacity of 1.817 million bpcd in its six-refinery system. Marathon brand gasoline is sold through approximately 5,600 independently owned retail outlets across 20 states and the District of Columbia.

In addition, Speedway LLC, a subsidiary, owns and operates the country’s second-largest convenience store chain, with approximately 2,740 convenience stores in 21 states. Marathon owns, leases or has ownership interests in approximately 10,800 miles of crude oil and light product pipelines.

Following the completion of its acquisition of Western Refining last year, Tesoro Corp. changed its name to Andeavor in August 2017.  The Western Refining acquisition added 246,015 bpcd of oil refining capacity to Tesoro, raising its total oil refining capacity to 1.109 million bpcd. Andeavor operates 10 refineries in the mid-continent and western United States.

Andeavor’s retail-marketing system includes more than 3,200 stores marketed under multiple well-known fuel brands, including ARCO®, SUPERAMERICA®, Shell®, Exxon®, Mobil®, Tesoro®, USA Gasoline(TM) and Giant®. It also has ownership in Andeavor Logistics LP and its non-economic general partner.