Projecting a boom in global energy markets and the need for more capacity, Texas-based engineer-contractor CB&I announced the acquisition of The Shaw Group Inc. in a cash-and-stock deal valued at about $3 billion. The companies say it will create one of the world’s largest firms competing in the sector.
CB&I says it will use cash on CB&I's and Shaw's balance sheets to partly finance the deal.
Under the deal set to close in the first quarter of 2013, Baton Rouge, La.-based Shaw Group becomes a "business sector under the brand name CB&I Shaw," says the firm. Both companies' boards have approved the transaction. Shaw says Bernhard, who founded the firm, will leave to pursue other interests. One industry observer speculates he may run for public office.
Philip K. Asherman, chief executive of CB&I, says the transaction will enable the firm to become "fully diversified across the entire energy sector.”
J.M. Bernhard, Shaw's chairman, president and chief executive, says his company's "leadership position in the power, environmental and infrastructure industries will complement CB&I’s current business."
Following the July 30 announcement by The Shaw Group, analysts weighed the changed market dynamics.
Current and former top executives of both companies have long industry ties and have complementary capabilities in industrial fabrication, modular construction and maintenance work, says an industry source who asked not to be identified. The two firms also are involved in construction at two nuclear-plant sites in Georgia and South Carolina.
The acquisition "creates a formidable entity and a strong competitor," says Michael Landry, a managing director at industry mangament firm FMI. "There are definite synergies there."
In a report, Andrew Wittman of Baird Equity Research says the acquisition will "diversify CB&I's geographic exposure (currently 80% outside the U.S.), providing a more balanced 50-50 split of domestic and international work." He adds, "Over the long term, we expect Shaw's operations will likely benefit from a broader approach to project and construction management."
Industry observers say CB&I management has contemplated a Shaw acquisition for several years. "This has been a long time coming," says one industry source.
"With Shaw, CB&I gains a meaningful presence in U.S. power—in particular, new generation and emissions retrofit—and a pretty good O&M business through its government business," says Jamie Cook, lead engineering and construction-sector analyst for Credit Suisse.
The early-morning announcement caused shares of Shaw to rise 65%, to $44, in pre-market trading. That stock price is considerably higher than the price at which Shaw had been trading in recent years, according to one published report.
Shaw ranks at No. 12 on ENR's list of the top 20 firms in combined global design, construction and construction-management revenue, reporting $5.54 billion in 2011. CB&I ranks at No. 13, reporting $4.55 billion in those same categories.
Shaw has about $4 billion in contracting revenue, while CB&I reports $3.63 billion in that sector. CB&I says the combined companies will have 50,000 employees and $28 billion in backlog.
"This isn't just a merger of two services companies but consolidates two firms, each with a portfolio of technology packages used in petrochemicals and refining processes, and two companies with large fixed-asset components fabricating pipes, modules and vessels," says independent Wall Street analyst Avi Fisher. "These are unusual assets in the E&C industry, and, unlike services, they can be ring-fenced, protected and consolidated. I think that's the value in the acquisition."
Fisher adds that if the U.S. petrochemical construction market "revitalizes on inexpensive gas, that will benefit shareholders."