Citi Sees Delek, Alon USA 'Primed To Merge'

Possibilities of a merger between Delek US Holdings, Inc. DK and Alon USA Energy, Inc. ALJ have resulted in an overhang on the shares of both companies, Citi’s Fernando Valle said in a report. He added that the Delek - Alon USA combination seemed “increasingly likely” and could unlock value.

Analyst Valle initiated coverage of both companies with Buy ratings, and assigned price targets of $23 to Delek and of $10.50 to Alon USA.

Pressure On Shares

“Both stocks have been impacted by narrowing MidCon margins, rising RIN costs, and overhang from a potential DK-ALJ merger,” Valle wrote. He added that while both stocks were now trading at the bottom half of the group, a merger between the two would unlock value.

Merger Likely

Delek already has a 48 percent stake in Alon USA. Moreover, Delek has recently sold its retail assets to COPEC, raising sufficient funds to acquire the remaining 52 percent stake via cash, the analyst mentioned.

“Besides the synergies in procurement of crude and marketing of products, we see potential for a DK-ALJ partnership to unlock further value from ALJ’s assets through its balance sheet. The clearest synergy is $71m ALJ outlined in EBITDA that could be dropped into DK’s MLP, a value that alone represents 100% of ALJ’s market cap (at 8x),” Valle added.

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