CB&I (NYSE:CBI) announced on July 30 that it will acquire Shaw Group (NYSE:SHAW) for $3 billion, or $46 per Shaw share. The deal will be made up of $41 per share in cash and $5 in stock (0.13 shares of CB&I), and values Shaw at a 72% premium to July 27's close. The deal price also carries a seven times multiple to the 2012 EBITDA multiple for Shaw - a slight premium to the broader sector.

To execute the deal, CB&I will need to raise about $1.9 billion in debt financing, but the company expects the deal to be accretive almost immediately.

What CB&I Is Getting
CB&I has built itself largely on the back of its energy infrastructure business, building structures ranging from storage tanks to LNG terminals. In buying Shaw, CB&I is adding a company with significant business in power generation (that is, utility plants), as well as operations in environment, infrastructure and manufacturing.

Not only will this deal broaden CB&I's addressable markets, but it also adds heft and scope to its operating capabilities. With Shaw, CB&I should be better positioned for more direct construction activity as well as larger project wins. Said differently, CB&I is now a more formidable competitor to the likes of Fluor (NYSE:FLR), Jacobs (NYSE:JEC) and URS (NYSE:URS).

That's not quite all that CB&I is getting, though. Shaw has had some operational issues of late, and CB&I management has established a deserved reputation for execution - simply fixing what has ailed Shaw will go a long way towards paying for the deal.

SEE: Earning Forecasts: A Primer

Good Today, Better Tomorrow?
I would like this deal for Shaw well enough on the "fixer-upper" angle, but I believe there's more to it than that. The energy sector has been hot in terms of project activity, but that will not last forever - even if CB&I is leveraged to North American gas processing and LNG export expansion that has yet to take off.

With Shaw's energy business currently in a cyclical lull, I believe there's a reasonable case to be made that the eventual slowdown in energy project spending can be balanced by an improvement in utility activity. There are also some built-in synergies here, as CB&I has manufactured about three-quarters of the containment vessels used at U.S. nuclear plants (and Shaw is a major player in building/maintaining nuclear plants). At the same time, that substantial nuclear plant maintenance business ought to be a good opportunity for CB&I to farm free cash flow.

SEE: 5 Must-Have Metrics For Value Investors

The Bottom Line
Even with the upcoming sale of Shaw's remaining stake in Westinghouse to Toshiba (OTC:TOSYY), and the balance sheet flexibility that it was going to provide, it's hard to argue that Shaw investors are not getting a very solid deal here. It's also a risky deal for CB&I - while I like it, it's a transformative deal and those always carry outsized risks.

I wouldn't rush into CB&I, as fighting the tape is just asking for trouble. Nevertheless, I think the immediate post-news sell-off in CB&I shares has been excessive and I think investors may want to consider this new, larger and improved CB&I.

At the time of writing, Stephen D. Simpson did not own shares in any of the companies mentioned in this article.

Related Articles
  1. Economics

    Investing Opportunities as Central Banks Diverge

    After the Paris attacks investors are focusing on central bank policy and its potential for divergence: tightened by the Fed while the ECB pursues easing.
  2. Stock Analysis

    The Biggest Risks of Investing in Pfizer Stock

    Learn the biggest potential risks that may affect the price of Pfizer's stock, complete with a fundamental analysis and review of other external factors.
  3. Stock Analysis

    Allstate: How Being Boring Earns it Billions (ALL)

    A summary of what Allstate Insurance sells and whom it sells it to including recent mergers and acquisitions that have helped boost its bottom line.
  4. Options & Futures

    Cyclical Versus Non-Cyclical Stocks

    Investing during an economic downturn simply means changing your focus. Discover the benefits of defensive stocks.
  5. Markets

    PEG Ratio Nails Down Value Stocks

    Learn how this simple calculation can help you determine a stock's earnings potential.
  6. Investing Basics

    How to Deduct Your Stock Losses

    Held onto a stock for too long? Selling at a loss is never ideal, but it is possible to minimize the damage. Here's how.
  7. Investing

    What’s the Difference Between Duration & Maturity?

    We look at the meaning of two terms that often get confused, duration and maturity, to set the record straight.
  8. Economics

    Is Wall Street Living in Denial?

    Will remaining calm and staying long present significant risks to your investment health?
  9. Stock Analysis

    When Will Dick's Sporting Goods Bounce Back? (DKS)

    Is DKS a bargain here?
  10. Investing News

    How AT&T Evolved into a Mobile Phone Giant

    A third of Americans use an AT&T mobile phone. How did it evolve from a state-sponsored monopoly, though antitrust and a technological revolution?
  1. What does low working capital say about a company's financial prospects?

    When a company has low working capital, it can mean one of two things. In most cases, low working capital means the business ... Read Full Answer >>
  2. Do nonprofit organizations have working capital?

    Nonprofit organizations continuously face debate over how much money they bring in that is kept in reserve. These financial ... Read Full Answer >>
  3. Can a company's working capital turnover ratio be negative?

    A company's working capital turnover ratio can be negative when a company's current liabilities exceed its current assets. ... Read Full Answer >>
  4. Does working capital measure liquidity?

    Working capital is a commonly used metric, not only for a company’s liquidity but also for its operational efficiency and ... Read Full Answer >>
  5. How do I read and analyze an income statement?

    The income statement, also known as the profit and loss (P&L) statement, is the financial statement that depicts the ... Read Full Answer >>
  6. Can working capital be too high?

    A company's working capital ratio can be too high in the sense that an excessively high ratio is generally considered an ... Read Full Answer >>

You May Also Like

Trading Center