by Aaron Levitt | August 2, 2012 7:00 am
North America’s energy landscape is currently a crisscrossed map of distribution bottlenecks, broken connections and pricing discrepancies. Eliminating those impediments is key to America’s journey toward energy independence. Modernizing our pipeline “midstream” infrastructure and expanding its ability to deliver energy to end users around the country — and out to the world — is simply essential to the nation’s energy efforts.
One of my favorite companies involved in this effort is Chicago Bridge & Iron (NYSE:CBI), a petroleum-related construction powerhouse that has built of some of the world’s largest onshore and offshore pipeline projects. Additionally, CB&I is one the leading designers and builders of liquefied natural gas (LNG) terminals, ethane crackers and hydrocarbon storage facilities. Its dominance in these areas is why I named it the best pick for the worldwide energy infrastructure build-out.
The growth story for CB&I continues to get better and better.
In a surprise move this week, CB&I announced a $3 billion deal to buy rival Shaw Group (NASDAQ:SHAW) in a combination that would create one of the most complete energy-focused engineering and fabrication companies in the world. For investors, the buyout highlights just how critical energy infrastructure is and why CB&I is the way to play the sector.
Under the terms of the deal, Chicago Bridge & Iron will pay roughly $3.04 billion in cash and stock in order to acquire its rival. CB&I’s offer consists of $41 in cash and 0.12883 share for each share of Louisiana-based Shaw. The equity portion had a value of $5 a share based on the “recent average price” of $38.81 for CB&I. Overall, CB&I will use cash on the balance sheets of both companies, along with approximately $1.9 billion in debt to finance the acquisition.
According to Bloomberg, the deal is the biggest of 79 construction and engineering acquisitions announced in the U.S. this year. The buyout values Shaw at roughly a 70% premium to its pre-announcement share price and at about 26 times earnings before interest, taxes, depreciation and amortization. While that might seem expensive — especially when compared to historical averages — CB&I is getting quite a bit for its money.
The most obvious benefit is that combined company will be one of the world’s largest energy-construction and engineering-contracting firms, with a backlog of more than $28 billion. Additionally, the acquisition will boost CB&I’s 2013 earnings by at least 10%.
Nonetheless, some of the deal’s best aspects could lie in the future. CB&I has built itself largely within the confines of the energy infrastructure business — the main reason why I tapped it before. But in buying Shaw, CB&I will add significant business in power generation and operations in other infrastructure projects like bridges as well as manufacturing plants. With more U.S. utilities switching to natural gas, this additional source of projects and backlog will ultimately boost CB&I’s bottom line down the road.
These additional areas of expertise now put CB&I, whose management has been good at execution, in a favorable position versus competitors like URS (NYSE:URS) and Fluor (NYSE:FLR).
Perhaps the most interesting aspect of the deal comes from the continuing nuclear renaissance. While it was put on hold after Japan’s Fukushima disaster, nuclear energy is quickly rebounding as a variety of nations turn to the power to help fund electricity deficits.
This will play a role in the CB&I-Shaw merger as well. Shaw is already a leading builder of nuclear power plants and is currently under contract to construct Southern’s () Vogtle plant. That’s the first new reactor to be constructed in the U.S. since the Three Mile Island nuclear disaster in 1979. CB&I is contracted to fabricate and assemble the concrete-and-steel buildings that will house those reactor units.
While the fate of new nuclear plants in the U.S. is still up in the air, globally construction remains brisk, and the new combination will be able to provide a one-two punch when it comes to designing and building these plants.
While some analysts have questioned the buyout, I think over the longer term it makes sense for both companies. Shaw, which has had some difficulty executing and some operational issues as of late, should be able to reach its full potential under CB&I’s umbrella. On the flipside, CB&I now has access to other critical infrastructure sectors as well as building up its nuclear business. It looks like a long term win-win.
So far, investors aren’t seeing it that way: CB&I shares have tumbled roughly 14% on the announcement, reaching their lowest point in almost a year. Analysts point to the fact that the firm’s approach to acquisitions has strictly focused on smaller targets, rather than a deal of this size in terms of adding backlog and whole new business segments.
However, this is the kind of long-term blockbuster deal CB&I needs to continue to be competitive in global infrastructure.
Overall, the buyout makes CB&I that much more attractive as an investment. I’d be looking to add shares on the current or any future weakness.
As of this writing, Aaron Levitt doesn’t own any securities mentioned here, but he may initiate a position in CBI within the next 72 hours.
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