Looking Deeper into The Shaw Group's Acquisition
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The Shaw Group (UNKNOWN: SHAW.DL) hit the news feeds recently when James Bernhard, the company’s founder, chairman and CEO, sold the majority of his stake after shareholder approval to be acquired by Chicago Bridge and Iron Company (NYSE: CBI) in December. The Chairman and CEO has sold roughly less than a million shares, with the total transaction worth of around $45 million. Denali, the 1.1% owner, criticized the offer of $46 per share as too low. It also asked for a special committee to investigate Bernhard for the potential conflict of interest in the company’s sale.
Shaw’s Business Snapshot
Shaw is the global engineering, construction, maintenance and fabrication provider for industrial and infrastructure customers, with seven reportable segments including Power, Plant Services, Environmental & Infrastructure, Fabrication & Manufacturing, Energy & Chemicals, Investment in Westinghouse and Corporate. The two main sources of its revenue were the Power and E&I segments, with $1.97 billion and $1.1 billion in revenue, respectively. However, the power segment had a very small margin, thus it only contributed $30.6 million to the income before taxes. The biggest earning contributor was E&I segment, bringing in $102.8 million in income before taxes, accounting for more than 42.8% of the total income. In terms of geography, the majority of its sales ($24. billion) were to the American region, accounting for around half of its total revenue in fiscal 2012, whereas the EMEA and Asian region equally shared the other half of the revenue.
Buyer’s Business Overview
CBI, founded 1889, had a long history of operating in the engineering, procurement, and construction industry. With more than 18,000 employees in the world in more than 70 countries, CBI is one of the leading providers of engineering and EPC services. It had three main business segments including Steel Plate Structures, Project Engineering and Construction, and Lummus Technology. The business had quite a diversified customer base. In 2010 and 2009, there were no customers that accounted for more than 10% of the total revenue. In 2011, only a Colombian refinery project for Reficar represented around 15% of the total 2011 revenue. The company’s largest customers have had long relationships with the company, especially in the hydrocarbon industry, including petroleum and petrochemical companies.
Low Offering Price?
In July 2012 the acquisition agreement between the two was announced. CBI would acquire Shaw in a mixed transaction of stocks and cash, with an offering price of $46 per share, including $41 in cash and $5 in 0.12883 CBI shares in equity. Thus, the total transaction value is roughly $3 billion. As of November 2012, The Shaw Group reported to have more than $2.2 billion in cash, $1.6 billion in total debt, and $1.05 billion in total stockholders’ equity. The deal valued Shaw at 7x FY12E and 5.6x 2013 Street consensus adjusted EBITDA. But according to Yahoo! Finance, the TTM EBITDA was around $248.52 million. With the net cash of $600 million, the TTM EV/EBITDA was nearly 9.66x. One of its peers, URS Corporation (NYSE: URS), with much higher net debts, and higher EBITDA of $772.3 million, is valued at only 6.32x trailing EV/EBITDA by the market.
Denali Thinks So!
In August, Denali sent the letter to Shaw, pointing out that the company should deserve a much better offering price, around $50 to $70 per share. The higher price tag was because of several reasons: First was the operational and financial volatility would be removed with the sale of problem E&C segment. Second, the debt related to Westinghouse would be put back to Toshiba in the end of the first quarter of 2013. Third, there had been a storm in nuclear and natural gas industry, but those two industries will not be in this negative situation forever. Denali stated that CBI’s CEO’s statement to pay 7x EBITDA for Shaw was misleading, as it was actually 5x, pro forma, to 4x. Including the synergies of the two companies, the price would be lowered to 3x. Denali mentioned that the 7x – 9x would be more fair range on the EBITDA 2013 of $340 million. However, the deal was approved by 83% of total company’s outstanding shareholders, and it is expected to close in the first quarter of 2013.
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