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. Term

    What are Non-GAAP Earnings?

    Non-GAAP earnings are a company’s earnings that are not reported according to Generally Accepted Accounting Principles.
  2. Mutual Funds & ETFs

    ETF Analysis: PowerShares FTSE RAFI US 1000

    Find out about the PowerShares FTSE RAFI U.S. 1000 ETF, and explore detailed analysis of the fund that invests in undervalued stocks.
  3. Options & Futures

    Use Options to Hedge Against Iron Ore Downslide

    Using iron ore options is a way to take advantage of a current downslide in iron ore prices, whether for producers or traders.
  4. Stock Analysis

    Fortinet: A Great Play on Cybersecurity

    Discover how a healthy product mix, large-business deal growth and the boom of the cybersecurity industry are all driving Fortinet profits.
  5. Stock Analysis

    2 Catalysts Driving Intrexon to All-Time Highs

    Examine some of the main reasons for Intrexon stock tripling in price between 2014 and 2015, and consider the company's future prospects.
  6. Stock Analysis

    Net Neutrality: Pros and Cons

    The fight over net neutrality has become an amazing spectacle. But at its core, it's yet another skirmish in cable television's war to remain relevant.
  7. Charts & Patterns

    Understand How Square Works before the IPO

    Square is reported to have filed for an IPO. For interested investors wondering how the company makes money, Investopedia takes a look at its business.
  8. Technical Indicators

    4 Ways to Find a Penny Stock Worth Millions

    Thinking of trading in risky penny stocks? Use this checklist to find bargains, not scams.
  9. Professionals

    Chinese Slowdown Affects Iron Ore Market

    The Chinese economy's ongoing slowdown is having a major impact on iron ore demand.
  10. Investing Basics

    Why do Debt to Equity Ratios Vary From Industry to Industry?

    Obtain a better understanding of the debt/equity ratio, and learn why this fundamental financial metric varies significantly between industries.
RELATED TERMS
  1. Equity

    The value of an asset less the value of all liabilities on that ...
  2. Profit Margin

    A category of ratios measuring profitability calculated as net ...
  3. Quarter - Q1, Q2, Q3, Q4

    A three-month period on a financial calendar that acts as a basis ...
  4. Debt Ratio

    A financial ratio that measures the extent of a company’s or ...
  5. Price-Earnings Ratio - P/E Ratio

    The Price-to-Earnings Ratio or P/E ratio is a ratio for valuing ...
  6. Net Present Value - NPV

    The difference between the present values of cash inflows and ...
RELATED FAQS
  1. How do dividends affect retained earnings?

    When a company issues a cash dividend to its shareholders, the retained earnings listed on the balance sheet are reduced ... Read Full Answer >>
  2. What is the formula for calculating compound annual growth rate (CAGR) in Excel?

    The compound annual growth rate, or CAGR for short, measures the return on an investment over a certain period of time. Below ... Read Full Answer >>
  3. What is the difference between called-up share capital and paid-up share capital?

    The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
  4. When does the fixed charge coverage ratio suggest that a company should stop borrowing ...

    Since the fixed charge coverage ratio indicates the number of times a company is capable of making its fixed charge payments ... Read Full Answer >>
  5. Why would a corporation issue convertible bonds?

    A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>
  6. What is the difference between the return on total assets and an interest rate?

    Return on total assets (ROTA) represents one of the profitability metrics. It is calculated by taking a company's earnings ... Read Full Answer >>

You May Also Like

COMPANIES IN THIS ARTICLE
Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!