CB&I's Acquisition Of Shaw Is Shocking And Awesome

By Stephen D. Simpson, CFA | July 30, 2012 AAA

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.

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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.

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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.

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