CB&I Goes All-In on Big Energy With $3B Shaw Deal (Update 1)
By Antoine Gara - 07/30/12 - 3:13 PM EDT
Updated with additional analyst comments and information throughout
NEW YORK (TheStreet
) -- The stakes are rising in engineering mergers after energy-focused industry specialist Chicago Bridge & Iron
said it will buy Shaw Group
, a manufacturer of building equipment for oil companies and utilities, at a premium of more than 70% in a cash-and-stock deal worth $46 a share or $3.04 billion.
With the deal, Chicago Bridge & Iron will more than double its annual revenue and help transform it into one of the largest energy construction and engineering companies in the world. The move may also target a new cycle of capital spending by oil giants, nuclear energy companies and utilities, and follows other large deals in 2012 to bolster energy-operations.
As of 2011, CB&I reported revenue of less than $5 billion, while Shaw had sales of $6 billion, a drop from past years when revenue exceeded $7 billion.
However, the acquisition also comes with risk. Shaw Group lost $175 million last year, while CB&I reported a $255 million 2012 profit. Some of Shaw's recent struggles come from a push into the nuclear energy sector, culminating in 2008 when it and Westinghouse were contracted by Southern Company
to build the first new commercial nuclear plants in the U.S. in more than 30 years. The outlook for nuclear energy has subsequently dimmed after a March 2011 earthquake in Japan highlighted the risks of nuclear plants.
In early trading Monday, Shaw Group surged 59.6% to $42.59, a four-year high, while CB&I fell 12.3% to $35.70.
"We think a key question investors will have is how CB&I is getting comfortable with Shaw Group's nuclear and other execution risk," wrote UBS analyst Steven Fisher in a Monday note to clients. Fisher also noted that the deal could stoke M&A expectations in energy-focused engineering companies.
After successfully integrating the assets of Lummus Global from ABB
at a valuation of nearly $1 billion in 2007, Lazard Capital Markets analyst Will Gabrielski said that acquiring Shaw Group's more cyclical earnings could be a larger deal to handle.
CB&I's premium valuation, "was due to investor recognition of the company's successful integration of the acquired Lummus assets and resulting smoother earnings stream created from a more recurring, higher than industry average margin profile," wrote Gabrielski in a note to clients. "Shaw, on the other hand, has a history of lumpier results that we believe would add risk to CBI's consistent earnings
," he added, in a note that also highlighted few details on expected synergies after the deal is completed.
Under the terms of the merger, CB&I will acquire Shaw for $46 a share in cash and stock. Shaw's shareholders will receive $41 in cash and $5 in CB&I equity -- 0.12883 of the company's shares based on stock price of $38.81 -- for each Shaw share. CB&I said the deal will add to 2013 earnings per share, but didn't specify the size of the benefit in a press release.
"We expect that this will drive other E&C stocks deemed to be attractively valued and with healthy balance sheets higher today," said Fisher of UBS, highlighting Foster Wheeler
, McDermott International
. The analyst also noted Willobos Group
as benefitting from Monday's deal, in spite of balance sheet pressures.
After the merger closes, which is expected in the first quarter of 2013, CB&I said it plans to operate Shaw as a business sector under the brand name CB&I Shaw to enable the company to retain Shaw's brand equity and benefit from both companies resources, capacity and operating practices.
"This is a highly compelling transaction that will create significant value for our shareholders," said Philip Asherman, president and chief executive of CB&I.
"By adding them into the CB&I family, we will become fully diversified across the entire energy sector. We will have the capacity and the expertise to provide our clients with the full range of solutions, wherever they are in the world," he added, in a statement.
Cannacord Genuity analyst Yuri Lynk said that the premium priced deal give a lift to the depressed valuation of Fluor
and Jacobs Engineering
, while signaling little upside to current stock multiples of construction contractors Aecon Group
, Bird Construction
and The Churchill Group
CB&I said it will finance the acquisition using cash on the balance sheets of both companies, along with roughly $1.9 billion in debt financing from Bank of America and Credit Agricole. Following the closing of the deal, CB&I said that Shaw Group Chairman and CEO J.M Bernhard Jr. will "pursue new business and public service interests."
Monday's merger comes amid a rebound in industrial M&A as some industrhy players try to scale their operations globally and into new products. In May, engineering giant Eaton
said it will buy electrical equipment supplier Cooper Industries
for $11.8 billion, making the industrial merger the largest U.S. acquisition of 2012, and bolstering expectations for additional M&A in the sector.
A near $4 billion acquisition of Thomas & Betts
by European giant ABB
in January signaled that after a post-crisis focus on bolstering capital, bets on a cyclical upturn in industrial spending could spark more deals
-- Written by Antoine Gara in New York
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