Delek US Acquires Majority Equity Interest in Lion Oil

“Given that the El Dorado refinery has the ability to supply light products to portions of our convenience store network in Tennessee and Arkansas, we will, for the first time in our history, own and operate a refinery capable of supplying our retail stores in neighboring markets,” says Delek US Holdings CEO.

Delek US Holding Inc., a diversified energy company with assets in the petroleum refining, marketing and retail industries, has signed a definitive agreement to acquire the majority equity interest in Lion Oil Co., currently held by Ergon Inc.

In 2007, Delek US acquired a 34.6% minority interest in Lion Oil from multiple selling shareholders. At the close of the proposed transaction, Delek US will own an additional 53.7% equity interest in Lion Oil, bringing Delek US’ total equity ownership in Lion Oil to 88.3%. Upon becoming the new majority shareholder, Delek US will assume operational control and management of the Lion Oil refinery and certain related assets.

Lion Oil owns and operates an 80,000 barrel per day, 9.0 complexity refinery located in El Dorado, Ark.; the 80-mile Magnolia-El Dorado crude oil transportation system that runs between Shreveport, La., and the Magnolia crude terminal (West of the El Dorado refinery); the 28-mile El Dorado crude oil transportation system that runs from the Magnolia terminal to the El Dorado refinery, as well as two associated product pipelines; a crude oil gathering system with more than 800 miles of pipeline; and three light product distribution terminals located in Memphis and Nashville, Tenn., and El Dorado, Ark. Lion Oil also owns and operates an asphalt distribution terminal located in El Dorado, Ark.

Delek US has agreed to acquire Ergon’s equity interest in Lion Oil for a combination of cash, stock and the payment or replacement of all debt currently owed by Lion to Ergon. According to the agreement, Delek US will issue restricted shares of common stock to Ergon valued at approximately $45 million (determined by the average closing price of Delek US’ common stock for the 10 consecutive trading days immediately preceding the closing date). Lion Oil and/or Delek US will make a cash payment of $50 million to Ergon. Lion Oil will execute a new $50 million term note payable to Ergon that will be guaranteed by Delek US. Lion Oil will divest certain assets to Ergon.

In addition, Delek US has agreed to assist Lion Oil in obtaining third-party financing of working capital previously provided by Ergon.

“This transaction represents a significant expansion of our downstream asset base throughout the Gulf Coast and Mid-Continent regions. Upon becoming the new majority owner and operator of Lion Oil, we will be well-positioned to participate at each level of an integrated supply chain that includes the production, wholesale distribution and retail marketing of refined products in the region,” stated Uzi Yemin, president and CEO of Delek US Holdings.

“The addition of the El Dorado refinery will more than double our total production capacity. The El Dorado refinery’s location affords it access to a variety of local, domestic offshore and foreign crudes. Over time, we believe we will be able to source and process an increased quantity of cost advantaged crudes at El Dorado, representing a clear economic opportunity for us,” continued Yemin.

The El Dorado refinery is currently able to produce low sulfur gasoline and ultra low-sulfur diesel products, in compliance with existing clean fuels requirements. The refinery completed a turnaround in late 2009, with the next turnaround currently scheduled for 2014.

“From a strategic perspective, we believe this transaction will further our goal of being a vertically integrated company and will diversify our exposure beyond a single refining asset,” Yemen said. “Given that the El Dorado refinery has the ability to supply light products to portions of our convenience store network in Tennessee and Arkansas we will, for the first time in our history, own and operate a refinery capable of supplying our retail stores in neighboring markets.”

“This transaction will also significantly expand our wholesale distribution network in multiple new markets throughout the Mid-Continent region. From El Dorado, we will have the ability to market products to owned and third-party terminals with access to a major product pipeline system which runs from the Gulf Coast into the Midwestern U.S.,” stated Yemin.

The management of an integrated supply chain will help to mitigate supply risks while optimizing distribution synergies across the downstream asset base, positioning the company to expand its competitive reach.

“With the continued support of our Israeli relationship banks and our majority shareholder, Delek Group, we are in the process of securing long-term financing for this transaction. Moreover, as a result of our ongoing financing efforts and increasing free cash flow from current operations, we anticipate Delek US will have improved liquidity at the close of this transaction, when compared to year-end 2010,” stated Yemin. “We look forward to partnering with the employees of Lion Oil and the community of El Dorado. We remain committed to operating all of our businesses in a safe, reliable and environmentally sound manner that will grow value for our shareholders, while providing economic benefits to the employees and customers in the areas that we serve.”

The transaction is expected to close during the second quarter 2011, subject to the completion of financing arrangements and the satisfaction of customary closing conditions. Upon closing, Delek US will discontinue use of the cost method of accounting for its investment in Lion Oil, and Lion Oil will be treated as a consolidated subsidiary of Delek US.

The retail segment of Delek US Holdings markets gasoline, diesel and other refined petroleum products and convenience merchandise through a network of company-operated retail fuel and convenience stores, operated under the MAPCO Express, MAPCO Mart, East Coast, Discount Food Mart, Fast Food and Fuel and Favorite Markets brand names.

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