Marathon Petroleum to Buy Hess's Retail Business for $2.87 bln

• Marathon unit Speedway to buy the business
• Deal to give Speedway gas stations, East Coast stores
• Marathon shares up slightly, Hess up 1.8 percent

Refiner Marathon Petroleum (MPC) Corp said it would buy oil and natural gas company Hess Corp's retail and transport business for $2.87 billion, expanding its network of gas stations and convenience stores along the U.S. East Coast.

While Hess has been shedding downstream assets to focus on more profitable shale drilling, the deal offers Marathon a buffer against the volatile refining business by boosting exposure to more stable cash flows from retail. It also provides a guaranteed market for the company's fuel, Marathon's Chief Executive Officer Gary Heminger said on a conference call on Thursday.

Marathon Petroleum sells gasoline, food and drinks mainly through 1,480 Speedway convenience stores it owns and operates in nine states in the U.S. Midwest. The deal will create the largest company-owned and operated convenience store chain in the United States, measured by revenue.

Marathon also sells its fuel at 5,200 independent retail outlets. Fuel from many refiners is sold by other brands.

Hess, which operates 1,256 stores in 16 states along the East Coast and Southeast, will use the sale proceeds for additional share buybacks and has increased its existing repurchase program to $6.5 billion from $4 billion, it said.

At the behest of activist investors who saw the stock as undervalued, Hess has been shedding oil, gas and other assets it does not consider core to its U.S. exploration and production business. The company's shares have climbed to a five-year high.

In January Hess filed with regulators to spin off its retail operations, but analysts said an outright sale generates much more upfront cash.

Marathon said it would pay $2.37 billion in cash, plus an estimated $230 million in working capital and $274 million for capital leases. The combined business was expected to report adjusted 2013 revenue of more than $27 billion.

The deal's higher-than-expected valuation may give investors pause, Roger Read, analyst at Wells Fargo (WFCNO) said in a client note.

Under the agreement, Marathon has three years to convert the Hess stores to the Speedway brand, a process that is expected to cost a total of $410 million, the company said.

The addition of the Hess gas stations expands the market for gasoline produced at Marathon's refineries.

"With this significant geographic expansion, we will be able to further leverage our integrated refining and transportation logistics operations, providing an outlet for an incremental 200,000 bpd of assured sales from our refining system," Heminger said in a statement.

Barclays Capital acted as financial adviser to Marathon in the deal that is expected to close late in the third quarter.

Shares of Marathon rose 0.6 percent to $88.28 and shares of Hess Corp climbed nearly 1.6 percent, or $1.59, to $90.89 in midday New York Stock Exchange trading.

(By Anna Driver and Sayantani Ghosh, Reporting by Anna Driver in Houston and Sayantani Ghosh in Bangalore; Editing by Don Sebastian, Maju Samuel, Terry Wade and Sofina Mirza-Reid and David Gregorio)