Tesoro Corp (TSO-NYSE, $65.89). Investment Implications of a Potential Winning bid for Citgo.

Should TSO prove successful in acquiring CITGO, this will roughly double the size of the company.

Citgo’s estimated EBITDA for 2014 may range from $1.7 billion to $2 billion. At an estimated purchase price of $10 billion, this would price the purchase at 5.9X EBITDA.

In order to complete the purchase, Tesoro may hive off roughly $1 billion of non-core assets to the Tesoro Limited Partnership. The most recent purchase of assets by TLLP was valued at roughly 10X EBITDA. Vending assets to the partnership, would reduce EBITDA by roughly $120 million.

Of the $9 billion in remaining cost, Tesoro could supply roughly $1 billion towards the purchase from cash-on-hand. I assume that TSO would issue roughly 20 million shares of equity to generate an additional $1.3 billion. This would bring the amount required from bond issuance or syndicated loans down to $6.7 billion US.

Assuming that the cost of interest financing would range around 6%, TSO’s net EBITDA accrual from the purchase could total $1.1 billion before synergies.

Should Tesoro ultimately prove successful in its goal of buying Citgo, a 7X EV/EBITDA multiple on the merged assets may result in a fair market value for the underlying coming shares of roughly $120 US in the near term. This presupposed that refining margins and retail margins remain status quo. This does not assume meaningful synergies and improved operating efficiencies, that may be wrung from a rather poorly managed operator.