Michael Baker: The Board Has Created An Excellent Deal For Shareholders

| About: Michael Baker (BKR)
This article is now exclusive for PRO subscribers.

Shares of Michael Baker (NYSEMKT:BKR) are spiking upwards after the company has agreed to sell itself to Integrated Mission Solutions, a privately held firm.

After a previous takeover attempt has failed, Integrated Mission Solutions has stepped up and offered a knock-out premium for the business. Shareholders receive a more than fair value for their holdings, as the board negotiated an excellent deal.

The Deal

Michael Baker announced that it has signed a definitive merger agreement to be acquired by Integrated Mission Solutions, which in itself is an affiliate of DC Capital Partners.

Shareholders in Baker will receive $40.50 per share in cash for each share they currently own, valuing the company at $397 million. This represents a 55% premium compared to Friday's closing price. The price tag represents a 93% premium to the share price on the 18th of December, the day before DC approached Baker.

Integrated Mission Solutions has agreed to preserve its culture by keeping its presence in Pittsburgh, keeping its organization and culture intact. The engineering, design and construction service provider serves stable and growing industries including aviation, homeland security,oil and gas and water industries, among others.

Combined, the companies will generate $1.0 billion in revenues, being generated by some 5,000 employees on a global platform.

For the year of 2012, Michael Baker generated revenues of $593.4 million, up 10.2% on the year before. Net income fell to merely $2.8 million, down from $17.3 million in the year before. The company operates with a net cash position of $79 million.

As such, operating assets are valued at roughly $314 million, or just over 0.5 times its annual revenues.

The board of directors of Baker has already approved the deal. The deal is furthermore subject to normal closing conditions including a waiting period under the Hart-Scott-Rodino antitrust act. The deal is expected to close in either the third or fourth quarter of this year.


Michael Baker ended its first quarter with $69.6 million in cash, equivalents and short term investments. The company operates without the assumption of debt, for a solid net cash position.

Revenues for the first quarter of its fiscal 2013 came in at $144.0 million, down 5% on the year before. Net income attributable to shareholders roughly tripled to $5.5 million for the quarter.

The decline in first quarter revenues comes after years of steady increases in revenues. Annual revenues rose by a cumulative 33% between 2009 and 2012. Net income fell from $27 million in 2009 to just $2.8 million over the past year. While first quarter revenues fell, profitability was on the rise as cost saving efforts are paying off.

Michael Baker currently pays a quarterly dividend of $0.18 per share, for an annual dividend yield of 1.8% at the moment.

Some Historical Perspective

Shares of Michael Baker have seen their fair share of volatility over the past decade. Shares rose from merely $10 in 2003 to highs of $50 in 2007. Shares sold off toward $20 per share in 2008 but recovered to $40 in 2009 and 2010.

Given the deteriorating profits in recent years, shares gradually fell toward $20 in 2012. This attracted interest from MSI which now acquires the business for $40.50 per share in cash.

Investment Thesis

While it was already well-known that Integration Mission Solutions had an eye on Michael Baker, the definitive deal price is quite generous.

The share price of Michael Baker has underperformed in recent years. While revenues were steadily on the rise, earnings were stagnating at best, and actually falling. The uncertainty as a major US government contractor has presented some challenges amidst fiscal consolidation. As such the overseas expansion opportunities might create a right balance again in the business.

DC Capital already tried to acquire Michael Baker back in December of last year when it offered $24.25 per share for the firm. The opportunistic move was well timed after Michael Baker saw CEO Mallory leave the company just a week earlier, and the company announced plants to reduce annual costs by $18 to $20 million.

Yet the board held off the eventual sale and has negotiated a definitive price which is 67% higher. This implies a valuation of operating assets at 0.5 times annual revenues and 12-13 times peak earnings of $25 million. Michael Baker should be able to earn that kind of money in the years forward.

Instead of pursuing this road alone, the board has created a lot of instant value for shareholders by selling the business at a fair price.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.