Analyzing CB&I’s Shaw Group Acquisition
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Recently, Chicago Bridge & Iron Company N.V. (NYSE: CBI) announced its intention to purchase The Shaw Group Inc. (NYSE: SHAW) for $46 per share, a 72% premium to Shaw’s pre deal closing price of $26.69 per share. CB&I will pay $41 per share in cash and $5 per share in CB&I stock. The cash part is expected to be financed by cash on the balance sheets of both companies and by $1.9 billion of debt. CB&I’s management expects the acquisition to be “double-digit accretive” within its first year. However, I remain a bit concerned given the Shaw Group’s spotty project execution history and the high multiple CB&I paid for the company.
Project Execution Concerns
One of the key factors which will determine the success of this acquisition is how well Shaw can execute its backlog and in particular its two major U.S. nuclear projects in backlog for Southern Company (NYSE: SO) and SCANA. These two will be the first new nuclear plants built in the United States in decades and are both in their early stages. Although, CB&I’s management acknowledged the investor concerns regarding Shaw Group's execution track record, they indicated their comfort with SHAW’s backlog quality based on thorough due diligence. CB&I is also working on the projects with Shaw and has ongoing dialogue with Southern and Toshiba, and feels confident in the contract structure.
I am a bit skeptical though and would recommend investors to watch out for next couple of quarters of Shaw Group’s earnings which might give some sense on where things are headed. If nuclear earnings start to ramp up, it will be positive for CB&I. If there are some major disappointments it will be negative for CB&I and could even challenge the deal.
Valuations at the Upper End
On the valuation front, CB&I paid ~7x EV/EBITDA for Shaw which is towards the upper end of the 4-8x acquisition multiple range announced or implied by its Energy & Chemicals peers over the past few years. The transaction multiple also represents a premium to the E&C sector’s current average EV/EBITDA of 6.0x and CB&I’s current multiple of 5.8x. I believe CB&I overpaid for Shaw and lot of things need to go in the right direction for this deal to be successful.
CB&I’s stock price has risen from sub 20 levels during mid 2010 to over $40 before the deal. The company has seen good execution in the last few years. It has been generating solid cash flows and investors viewed CB&I as a good way to play shale gas development and LNG. I believe Shaw group’s acquisition will add unnecessary complexity to CB&I’s business as it has heavier concentration towards nuclear power. It will also add leverage to CB&I’s balance sheet. The investors who liked CB&I as a proxy for the shale gas and LNG theme are likely to be disappointed or confused with this added uncertainty. I would recommend them to consider KBR Inc. (NYSE: KBR) as a second play on the shale gas and LNG themes if they want to avoid this complexity.
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