Greetings and welcome to the Sunoco Acquisition of Parkland Corporation conference call. At this time, all participants are in a listen-only mode. The question-and-answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. Please note this conference is being recorded. I will now turn the conference over to your host, Scott Grischow, SVP, Finance and Treasurer. Thank you. You may begin.
Good morning, and thank you for joining our call to discuss today's announcement of Sunoco acquiring Parkland Corporation. A press release and presentation can be found on Sunoco's investor relations website describing the highlights of this transaction. A link to a replay of this call will be available on Sunoco's website shortly after the call is completed. On the call with me this morning from Sunoco are Joe Kim, President and Chief Executive Officer, Karl Fails, Chief Operating Officer, Austin Harkness, Chief Commercial Officer, and Dylan Bramhall, Chief Financial Officer. Joining us in Calgary from Parkland Corporation is Bob Espey, President and Chief Executive Officer, and Michael Jennings, Executive Chairman of the Board. A reminder that today's call will contain forward-looking statements that include expectations and assumptions regarding today's announcement and the partnership's future operations and financial performance.
Actual results could differ materially, and the partnership undertakes no obligation to update these statements based on subsequent events. Please refer to our press release, as well as our filings with the SEC, for a list of these factors. Also, please refer to the additional legal disclosures in the press release and on slides two and three of the presentation. We will be referring to several of the slides in the presentation we posted on our website today, and I'd like to begin today's discussion by providing the key terms of the transaction and financial benefits, and then turn it over to Bob and Joe. Turning to slide four in the materials, as we announced, Sunoco will acquire 100% of the outstanding Parkland common shares in a cash and equity transaction valued at $9.1 billion, including assumed debt. The combined company will have an enterprise value of nearly $24.5 billion.
As part of this transaction, we will put in place a mechanism for the equity that we are issuing, which will be a new publicly traded vehicle, Sunoco Corp, that will be a corporation for tax purposes. Each Parkland common share will be exchanged for 0.295 Sunoco Corp common units and CAD 19.80, subject to customary proration. The total consideration of CAD 43.33 per share represents a premium of 25% based upon the seven-day volume-weighted average prices of both Parkland and Sunoco as of May 2, 2025. The $2.6 billion of proposed cash consideration is supported by a fully committed bridge facility, and we expect to permanently finance this through a combination of senior notes and preferred equity prior to close.
We expect the immediately accretive transaction to generate at least 10% accretion to distributable cash flow per unit and at least $250 million of annual synergies in the third year after close. The combined company will maintain a strong financial foundation, have greater scale, and lower business risk. We expect to return to our four-times target leverage ratio within 12-18 months post-close. Finally, the transaction is subject to regulatory approvals and a Parkland shareholder vote. We expect to close the transaction in the second half of 2025. With that, I will now turn the call over to Bob.
Thank you, Scott. Good morning, everyone. Thank you for joining us today as we announce the significant milestone for Parkland and Sunoco. Today marks an exciting moment as we bring together two outstanding organizations and the culmination of years of constructive engagement with Joe and his team. The combination of these two companies delivers compelling financial benefits that we are confident will maximize value for Parkland shareholders at an attractive 25% premium. The combination of Parkland with Sunoco is immediately accretive for shareholders. It optimizes for stability and upside, creates the largest independent fuel distributor in the Americas, and positions shareholders to benefit from future growth through increased cash flow for reinvestment in the Canadian business and ongoing distribution to our shareholders. Let me highlight why this combination represents a compelling value proposition for all stakeholders.
This combination with Sunoco provides Parkland's shareholders with the highest value and the greatest proceeds, while also affirming Sunoco's and Parkland's commitment to Canada, a country that has played a vital role in our combined history. Sunoco is a strong organization and clearly the right choice for Parkland. Joe and his team bring to the table a common focus on growth and a commitment to servicing customers, coupled with a proven ability to integrate large acquisitions that benefit both employees and equity owners. Sunoco has a track record of outperforming the market over the long term and consistently growing shareholder distributions at a higher rate than its peers. The management team has executed their strategy successfully during some very challenging economic periods in recent years. Lastly, they have a history of previous investments in Canada, and the Sunoco team is very excited to return.
Sunoco is committed to retaining a Canadian head office in Calgary and a strong operating presence throughout Canada. They will continue to invest across the business, including in Parkland's innovative low-carbon refinery and its operations for the long term. This underscores their understanding of our country's economic priorities and their respect for our company's heritage and commitment to our local communities. In closing, I want to emphasize something that is deeply important to me, and I know to Joe as well. The combined scale of Parkland and Sunoco positions our shareholders to directly benefit from the significant upside we see in this partnership. Together, the combined company will offer greater financial stability, enhanced flexibility, and robust growth. Equally important to me are the incredible opportunities this creates for our employees. I'm immensely proud of the Parkland team, who will have the opportunity to contribute their talents under Joe's leadership.
Our companies share common values, and I am confident that our team will thrive as part of a larger, stronger organization with even greater possibilities ahead. I am confident that this transaction is a win for Parkland shareholders, a win for employees, and a win for Canada. Thank you.
Thanks, Bob. Good morning, everyone. Before providing commentary on the transaction, I want to begin by thanking Bob and the Parkland team. Under Bob's leadership, Parkland's growth has been incredible. Bob has been CEO for 17 years. During this time, he and his team have grown Parkland from a small regional fuel retailer into one of Canada's leading fuel and convenience companies, with international operations in 26 countries, a remarkable achievement that deserves recognition. When Bob and I met a couple of years ago, we started talking about the future. As we continued to discuss possibilities, it became increasingly clear that a combined path forward, Parkland and Sunoco together, would be much stronger than continuing on separate tracks. I believe it's worth repeating what Bob said earlier.
Over the short and long run, we believe that both sets of equity holders will win, our employees will win, and the consumers will win. We're excited to welcome the Parkland team members. As for the overview of the deal, the industrial logic is powerful, and the economics are extremely compelling. Let me start with the industrial logic. This transaction creates the largest independent fuel distributor in the Americas. The combined company will distribute over 15 billion gallons annually. Scale is vital in the fuel distribution business. More scale means more cost of goods sold advantages. The combination results in the largest independent fuel distributor in the US, the Caribbean, and Canada. From a stability perspective, the pro forma company will benefit from greater diversification, integration opportunities, and leverage Sunoco's proven track record of managing expenses. Our new portfolio will also include refinery income.
A couple of thoughts on the refinery. First, the refinery would have contributed about 5% of 2024 pro forma EBITDA. Second, within our acquisition economics, we utilize less-than-mid-cycle projection. It provides a conservative floor while also providing potential material upside. Continuing on the subject of acquisition economics, as Scott mentioned, the transaction is immediately accretive with at least 10% accretion in year three when at least $250 million of run rate synergies will be realized. Our history of delivering on synergies is evident in our increases in DCF per common unit for eight consecutive years, and we are fully expected to deliver on this acquisition. As for the balance sheet, continuous improvement of our credit profile remains a foundational priority. Similar to what we accomplished with the NuStar Energy transaction, we expect to return to our four-times long-term leverage target within 12-18 months of close.
Furthermore, this transaction creates significant financial flexibility. Looking at year three, we anticipate the combined entity will generate more than 50% higher free cash flow than Sunoco as a standalone company. With the creation of SunocoCorp, we're creating an investment option to support our growth and welcome a new investor base. Let me wrap up. We believe this combination not only creates great opportunities for our collective employees, but also a stronger, more compelling investment case for current Parkland shareholders and future Sunoco stakeholders. Bottom line, the larger pro forma company will be more stable, stronger financially, and better positioned for growth. Operator, that concludes our prepared remarks. You may open the line for questions.
Thank you. We will now be conducting a question-and-answer session. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, please, while we pull for your questions. Our first questions come from the line of Spiro Dounis with Citi. Please proceed with your questions.
Thanks, Operator. Good morning, everybody. Just maybe want to start with the synergies and hoping to get a little bit more detail there. If you could, maybe just break out the different types of synergies you see with this deal. You mentioned the timing a little bit, when you see the full run rate, but if you could, maybe just when those could start to show up.
Yeah, Spiro, this is Karl. Here's how we're thinking about the synergy number. The $250 million that we included in our deck we think is very doable, and at this point, we think should be considered a floor. That's really made up of three different pieces, and we still have some work to do to size exactly how big each of these three pieces is. The first is Bob and the Parkland team have already been working on an optimization plan. I think if you reference some of their investor information, they've been talking about that. We want to work with that team. That effort's underway. That's going to provide a solid foundation for the synergies going forward. We're anxious to get involved with them and understand all of those activities.
I think the second thing to think about and where synergies are going to come is, as Joe mentioned in his prepared remarks, we know how to control expenses. Whenever you put two companies of this scale together, you're going to find operational efficiencies. I think the NuStar experience last year and the integration and some of the efficiencies we found on the expense side also give us confidence and experience in figuring out how to achieve those in large acquisitions. The third piece of synergies are going to come on the commercial side. In our investor presentation, we highlighted the scale that the combined company will have. I think both Bob and Joe highlighted that in their prepared remarks. We think that's really going to unlock a lot of advantages on the supply front, specifically in supply chain optimization.
Maybe I'll give Austin Harkness a couple of minutes, and he can give you some examples on what we're thinking about that.
Yeah. Karl laid out the three big buckets. Generally, in a transaction like this, one of the biggest areas of opportunity for commercial synergies is going to be in supply chain optimization. Joe mentioned scale in his prepared remarks. Just to frame out how we think about this with a little bit more detail, there are a lot of levers you can pull, but generally, we look to one of two levers when it comes to supply chain optimization. The first would be site density. That is where you get a logistical advantage, an opportunity to optimize and reduce OPEX, and therefore cost of goods sold. The second would be sourcing optionality, which helps reduce cost of goods sold directly while also providing additional knock-on commercial upside. Given our scale and commercial sophistication, this acquisition really establishes both for us, particularly in the Caribbean.
If you take, for example, our Peerless acquisition in Puerto Rico, where we've been able to double EBITDA in the last three years or less than three years, despite the fact that it's just a single market within the broader Caribbean region. From a sourcing optionality standpoint, Puerto Rico runs on a different spec of diesel than the mainland U.S. As a result of that, we were able to begin sourcing barrels out of South America for the first time. In addition to directly reducing cost of goods sold on the island for us, it also provided indirect commercial value. For example, when that product is on spec for the mainland U.S., we can redirect those barrels to the Gulf Coast, New York Harbor, wherever that arb might be open, providing additional commercial upside.
From a site density standpoint, look, we've been able to do this operating a single point of fuel distribution in the broader Caribbean market. The Caribbean is essentially a big logistics play. This deal fundamentally step changes our ability to optimize cargo flows and OPEX across both the legacy Sunoco and Parkland portfolio assets. That is just an example, but hopefully provides a bit of a clearer picture of why we're so excited about the commercial opportunities in front of us as a result of this transaction.
Got it. Super helpful, Austin and Karl. Thank you. Maybe second one, hate to put the cart before the horse, but before you even have a chance to own these assets. I mean, Joe, you've sort of been in these businesses in the past. You've been bigger in retail. You had some sort of a tether to refining. Now sort of going back and getting into those businesses again in a bigger way. Would you consider all of these assets going forward as core? Would you be open to jettisoning them at some time? Obviously, you've had joint ventures with Energy Transfer in the past where you found ways to optimize the asset base. Is that something we can look forward to here as well?
Thanks, Spiro. Good question. Let me provide some clarity as to Parkland's asset base compared to Sunoco's asset base. We use different terminologies. I think the people that have covered Sunoco, we talk about our, when we say retail, we're really talking about our Hawaii company-operated business and our New Jersey Turnpike business. When Parkland uses the word retail, it's a lot broader. It's not necessarily talking about company-operated business. If you lay out, and we will lay this out for the street, you lay out the different channels that they operate in and the different channels that we operate in, be it commission agent, be it a dealer, a distributor, what everybody's going to find out is we're incredibly similar. They do not have a lot of company-operated sites in Canada or the Caribbean or the US. It is very similar in profile to Sunoco.
That's why whenever Austin talked about the confidence and Karl talked about the commercial confidence on both the expense and commercial side, it lays out very, very similar to us. I think one of the steps that the street has to do is get recalibrated about terminology, and we'll do our part to get all this cleaned up for you. I think after you see that, you're going to go, "Wow, there's a lot of similarities between the two companies." As far as on the refinery side, the question is, do we want to be like a refining and marketing company, a Valero, a P66? The answer is no. This is a very niche refinery, very integrated from a marketing standpoint. We like the asset. We like Parkland's assets in totality.
I think given my background, Karl's background, very other people's background, we have the expertise to be a contributor in this. It's not that much different than we have the transmix facilities. We're the biggest transmix facility operator in the US. It's another asset more in that line than you would think about from a more traditional R&M company. The final question, Spiro, is about we look to optimize. Of course, we always optimize, but we didn't purchase Parkland with the idea that we're going to sell this, this, and this, and this. Like any steward company that is trying to create value for shareholders, we're going to continually look at our existing assets, the assets we acquire presently or in the future, and we'll continue to optimize. Maybe a better way of saying that is we always channel manage within our US portfolio.
We're always taking some sites to optimize for stability, optimize for upside or eliminate downside. We may move from a dealer model to a distributor model to a commission agent model. This is right within our playbook.
Got it. Helpful, cool. Joe, I'll leave it there. Congrats, everyone.
Thanks, Spiro.
Thank you. Our next questions come from the line of Jeremy Tonet with JP Morgan. Please proceed with your questions.
Hi, good morning.
Morning, Jeremy.
Hi. Just wanted to start off with the new C Corp here and wanted to see, I guess, how that works relative to the MLP. Is there convertibility both ways or any other features that you would call out here?
Yeah, Jeremy, this is Scott. Yeah, no other specific features that I'd call out. I think our presentation lays out that it will be a 1099 security. It will be treated as a corporation for tax purposes, and it will own common equivalent units of Sunoco LP. It will not have any debts, and really the cash flow that comes into it will come in the form of distributions from Sunoco LP. Stepping back, I think this was an elegant, tax-efficient way to fund the equity consideration portion for the deal, and I think is a win for Parkland shareholders. I think looking forward, it has the added benefit of being a consideration or a currency option for future acquisitions or transactions that we may want to undertake.
I think additionally, it will be an option for new foreign investors who would like to invest in Sunoco LP and not have to deal with the tax consequences of doing so.
Got it. Thank you for that. I just wanted to see, I guess, with Parkland holders, if there's any lockup there or communications with large shareholders there, anything to think about on that side?
Hey, Jeremy, this is Joe. There's no lockup. As far as for Parkland shareholders, first of all, I don't speak for any particular or specific shareholders. However, like I said in my prepared remarks, this is a highly compelling transaction for both Parkland shareholders and for Sun unit holders. For the Parkland shareholders, you get a very, very healthy premium, material cash, and a stronger company underlying the equity going forward. We think this is an offer that's going to be hard for people to pass up.
Got it. Thank you for that. Do these Sunoco units get included in the IDR calculation to Energy Transfer?
Yes, they will. That's correct. There are common units being issued to SunocoCorp, so those will carry the IDR.
Okay. Is it a one-to-one relationship there, units to?
Yes. Yes.
Okay. I think that does it for me right now. Thank you.
Thanks, Jeremy.
Thank you. Our next questions come from the line of Teresa Chen with Barclays. Please proceed with your questions.
Good morning. I wanted to ask you on your plans as far as increasing the value of the wholesale chain now that you have significant presence both on the Atlantic basin side as well as Pacific. Are there any synergies to be had with this kind of global footprint? And, incrementally, what did Parkland assets do to build out your PADD 5 exposure in the US, Northern Canada, and then as well as across the Pacific Ocean in Hawaii?
Yeah, Teresa, this is Karl. I'll take kind of either side, and I'll kind of build on what Austin talked about earlier. I think he gave a really good example in the Caribbean. The Caribbean is supplied. He gave an example of where we buy diesel in South America. Now we're going to have a presence in the Atlantic basin. Even before, Sunoco had a presence kind of from Portland Maine all the way down into the Caribbean. Now we're going to be able to extend that into the eastern coast of Canada. We also have assets in Europe from the midstream side. We have, I'd say, a very robust and deep, from the supply and trading organization all the way to our midstream operations.
We understand those markets, and we have built supply chains and optionality that we think are going to come to bear with Parkland. Parkland is going to bring their own sophistication and depth of experience in the Caribbean, which we are very anxious to learn and understand and dig into. We are going to be able to marry that with what Austin's team does commercially kind of in the US and leverage, if possible, our assets in Europe. On the Pacific side, right, we already have a big short in Hawaii. We have added through the NuStar acquisition last year, we added some midstream assets. We now obviously are going to have a presence, be involved in the Western Canadian markets, both from the crude and product side. We already have relationships in Asia where Austin's team sources our product into Hawaii.
We think, again, kind of leveraging the expertise and knowledge in Canada and the crude markets that the Parkland team has with what we have on the product side, yes, I think you hit on maybe the next level down of kind of the commercial synergies that Austin was talking about.
Okay. Just thinking further out in a couple of years, as we look to the Pacific Coast of North America as far as refining supply goes, how do you see PADD5 in the US being supplied from here, given that you do have sourcing capability, I believe, in South Korea at the very least, and we are seeing some regular cargoes make their way, cargoes of refined products make their way into California as a regular trade? Is your footprint via Parkland going to be additive to that trade? Are you going to participate in that, or do you see this as more of a captive system and helping your wholesale distribution system downstream?
Yeah, Teresa, I think as we look at markets and how they unfold, it's a little bit of a fool's errand to know exactly what's going to happen 5, 10 years from now. Here's our general philosophy: if you look backwards over the last 20 years, you couldn't necessarily have anticipated every change in the market or supply chain dynamic. In every case when something changed, having scale and having critical infrastructure, the companies that had those two pieces were the ones that benefited the most. That is the core of our strategy. We have critical infrastructure from Hawaii to the West Coast, and now we're going to have that on the West Coast of the US, and now we're going to have that on the West Coast of Canada. We are going to have scale to be able to participate.
The third piece, I think we have a track record and sophistication of being able to identify and take advantage of those markets. I do not know that I can lay out for you exactly how that is going to shape out. I think some of the recent announcements of people operating in California do lead to California becoming an import market, at least in the medium term for refined products. Yes, we will be able to participate in that, and we will be able to participate in any other change that happens over the coming years.
Thank you.
Thanks, Teresa.
Thank you. Thank you. Our next questions come from the line of Gabe Maureen with Mizuho Securities. Please proceed with your questions.
Hey, good morning, everyone. If I could maybe ask a follow-up to the Sunoco questions around the flexibility of the dividend at SunocoCorp. I think you noted it'll be pari passu for at least two years, but then maybe what would the factors be or what you may anticipate be in terms of any tax leakage at the SunocoCorp level that may be in the United States?
Yeah, Gabe, this is Scott. I think you were asking about the tax implications after the two-year period. I think it's too early to give specific clarity around that. I think what I would say right now is that our preliminary analysis suggests manageable to potentially no near-term tax leakage to allow continued dividend parity for SunocoCorp.
Great. Maybe if I can also ask clearly, much bigger pro forma organization here, thoughts on maybe combining the balance sheets and targeting IG, and then also given, I guess, a lot of currency exposure coming with this deal to the extent you may or may not evaluate hedging out some of that currency risk?
Yeah, Gabe, this is Scott again. Look, we've obviously spoken with the agencies about the transaction and expect to have additional discussions with them between today and when we close. I don't want to get out in front of them regarding their view on the transaction or kind of our go-forward ratings with them. I think that said, part of the story today included our commitment to get back to our four-times leverage target within 12-18 months. Joe and Karl talked about the additional scale and diversification and stability the combined company will have. That's something we communicated to them as well. I think as I sit here today and Joe mentioned this, we recognize that much like our announcement for the acquisition of NuStar, we're going to be a show-me story.
Recall during that transaction announcement, we committed to returning to our four-times leverage target within 12-18 months post-close and achieved that in less than six months. I think that's a similar story here. We've laid out the roadmap, and we're going to execute on that. With respect to the currency exposure, certainly we're going to do what's right for the partnership. If that involves hedging and managing that risk, we'll undertake it. I don't have anything formal to announce today.
Thanks, Scott.
Thank you. As a reminder, if you would like to ask a question, please press star one on your telephone keypad. Our next questions come from the line of Ned Baramov with Wells Fargo. Please proceed with your questions.
Hey, good morning. Thanks for taking the question. I just had one quick one. As you brought on your geographic footprint, does repatriating capital back to the U.S. pose any tax risks?
Yeah, Ned, this is Scott. I think right now, if you're asking about the tax impact on Sun's DCF, I think what we see right now based on Parkland's historical tax profile and the structure we've set up, we aren't expecting an immediate material tax increase in cash taxes for the partnership.
That's great. Thank you.
Thank you. We've reached the end of our question and answer session. I would now like to turn the floor back over to Scott Grischow for closing comments.
Thanks everyone for joining us on the call today. We're very excited about today's news and the opportunities it's going to bring with it. We look forward to connecting with everyone soon with additional updates. Of course, we'll talk to everyone tomorrow on our first quarter earnings call. Have a great day.
Thank you, ladies and gentlemen. This does conclude today's teleconference. We appreciate your participation. You may disconnect your lines at this time. Enjoy the rest of your day.