Chicago Bridge's Acquisition Of The Shaw Group Creates An Energy Powerhouse

| About: Shaw Group (SHAW)
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Shares of The Shaw Group (SHAW) were the big winner in Monday's trading session after Chicago Bridge & Iron Co (CBI) announced it had agreed to acquire the company in a deal valuing The Shaw at $3.04 billion.

The offer

Under the terms of the deal, Chicago Bridge offers shareholders in The Shaw Group $41 in cash and 0.12883 shares of Chicago Bridge Group, valued at $5 based on "a recent average price" of $38.81 per share.

Based on Friday's closing prices the offer represents a 73% premium for shares of the Shaw Group. The $3.04 billion deal has already been approved by the boards of both companies, and is subject to shareholder approval.

The deal will be financed using the cash balances of both firms and about $1.9 billion in debt. Shaw's CEO Bernhard Jr., will leave the company after the deal closes. He states that, "While the Shaw is growing, it is in the best interest of the company's shareholders, employees and customers."

The company will be led by Chicago Bridge's CEO Asherman, and the deal is expected to close by early 2013. Asherman further commented saying that EPS will be accretive by at least 10% in 2013, excluding integration and acquisition costs.

Market reaction

Shares of The Shaw skyrocketed in today's trading session. Shares closed the day up 55% to $41.49, boosting the firm's market valuation by almost $1 billion. Shares still trade at a sizable 8.8% discount compared to the implicit offer value of $45.50, based on Monday's closing prices.

Shares of Chicago Bridge & Iron Company fell 14% in Monday's session ending the day at $34.94 per share. Shareholders in the firm lost roughly $550 million over the session.

The market capitalization of the combination rose by roughly $450 million as a reflection of the to be achieved synergies of the acquisition. Unfortunately no annual target synergies where specified by management of either company. However judging from Monday's market action, the market is clearly signaling that Chicago Bridge is overpaying for The Shaw.


According to Chicago Bridge & Iron Company, the combination will employ nearly 50,000 people and have an order backlog of $28 billion. Furthermore it will have engineering and construction facilities across the world. "This is a highly compelling transaction that we believe will create significant value for our shareholders," according to Philip Asherman, CEO of Chicago Bridge.

The Shaw Group reported annual revenues of $5.94 billion for its fiscal year ending in August 2011. The company net lost $175 million over that year as a result of many one-time charges. The company ended its third quarter, ending May 2012, with roughly $835 million in cash and equivalents. The company operated with roughly $1.65 billion in short and long term debt, for a net debt position of over $800 million.

Chicago Bridge & Iron Company reported annual revenues of $4.55 billion for 2011. It reported a net income of $255 million. The company ended its second quarter of this year with $553 million in cash and equivalents and $40 million in long term debt for a net cash position of roughly $500 million.


On a pro-forma basis the combination has 2011 annual revenues of $10.5 billion and it would report a slight profit of $80 million. Given the $800 million net debt level of The Shaw and the net cash position of $500 million of Chicago Bridge, pro-forma the company operates with roughly $300 million in net debt. Including the $1.9 billion estimated borrowings required for the deal the combination will operate with roughly $2.2 billion in debt. This debt level is acceptable given the size of the new combination and the incremental improvements in profitability.

The number of shares outstanding for Chicago Bridge would expand from roughly 97 million at the moment to 105 million if the deal goes through. This would value Chicago Bridge at $3.7 billion at the moment or merely 0.35 times annual revenues. No details were given regarding estimated annual synergies. CEO Asherman did expect the deal to be accretive to 2013's EPS and further on. Furthermore earnings per share would rise by more than 10% compared to 2012.

Chicago Bridge reported diluted earnings per share of $2.55 for the full year of 2011 and $1.34 for the first six months of 2012. Based on a rough estimate of annual 2012 earnings of $2.70 per share, earnings would come in at least $3.00 in 2013.

Investment Thesis

Analysts at Sterne Agee call the acquisition "A pretty healthy price relative to trading values over the last couple of months". However CEO Asherman tried to took away worries of investors whether his company was overpaying for the Shaw, especially in the light of the uncertainty regarding the nuclear division. "We're very satisfied, through a very thorough and comprehensive due diligence, that the nuclear projects are performing as we're expecting."

For shareholders of the Shaw, Monday's news is a great selling opportunity. Shares which peaked around $40 in the beginning of 2011 fell to low twenties in the second half of that year.

Shareholders in Chicago Bridge & Iron Company had a decent run as well. From lows of $5 in 2009, shares steadily rose upwards to $45 in the beginning of this year. Shares fell to $35 today, marking year to date losses of 8%.

Based on a conservative guide of $3.00 earnings per share by 2013, shares are valued at roughly 12 times annual earnings. While additional synergies could boost profitability, execution risks and a slowdown in the general economy could prove a drag. The market ruled today that Chicago Bridge made an "expensive" acquisition. Until the company gives more guidance regarding estimated synergies, I will stay on the sideline.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.