While CB&I’s $3 billion acquisition of The Shaw Group Inc. is widely expected to create an energy industry powerhouse, some skepticism about whether CB&I shareholders will approve the deal has been reflected in Shaw’s stock price.
In the days since the acquisition was announced July 30, Shaw’s shares have remained well south of the $46 offering price, though inching up last week slightly above the $40 mark as of Thursday. CB&I’s shares dropped 14 percent on July 30, but have since recovered around half of that.
Peter Ricchiuti, who heads Tulane University’s small-cap research group, said the near-$6 difference between Shaw’s stock price and CB&I’s acquisition offer is “huge.”
“That’s telling you there’s a lot of people who don’t think the deal is going through,” Ricchiuti said. “I personally think it will go through eventually.”
Still, the spread is very odd, he said. Ordinarily if the takeover price is $46, the takeover target’s stock would be closer to $42 or $43 by now.
The gap may leave an opportunity for arbitrageurs, Ricchiuti said.
A merger arbitrageur takes advantage of the uncertainty that the deal will not close, on time or at all, to make a profit. The uncertainty means that the acquisition target, in this case Shaw, trades at a discount to the offering price. The difference becomes the arbitrageur’s profit.
Ricchiuti said shareholder revolts have taken place in the past, although he considers that unlikely for CB&I, also known as Chicago Bridge and Iron Co.
“You can look at it from both ways. I think the Shaw people would be pretty happy, the Shaw shareholders,” Ricchiuti said. “But the CBI shareholders … if you’ve got a large number of institutions, which is probably what they have, it wouldn’t be too hard to get your big, big blocks of votes.”
And if all of the institutional shareholders are angry, they could reject the deal, Ricchiuti said.
Roughly 84 percent of CB&I’s shares are held by institutional investors and mutual funds, according to figures compiled by Thomson Reuters. Lord Abbett & Co., at 4.1 million shares or 4.3 percent, controls the largest block of shares of the 377 institutions that have invested in CB&I.
The analysts who follow CB&I were less than enthusiastic about the Shaw acquisition during a conference call following the announcement. Some have downgraded CB&I’s stock.
Ricchiuti said that may be because the analysts believe CB&I overpaid.
But the analysts have never negotiated with Shaw Chief Executive Officer Jim Bernhard, Ricchiuti joked. And they may also be overlooking all of the things that mesh in the deal, such as the companies’ engineering and construction abilities and the global prospects for nuclear power.
“Nuclear power going forward is going to be a great place, and Shaw really is the leader in that,” Ricchiutti said. “I think that’s one of the things they (CB&I) are getting at.”
Shaw is part of the consortium that holds the license for Westinghouse’s AP1000 nuclear reactors.
Shaw has invested $115 million in a Lake Charles plant, sometimes referred to as modular facilities, that makes components for the reactors.
CB&I President and Chief Executive Officer Philip K. Asherman cited the longer-term potential of the nuclear business in a July 30 conference call and webcast with analysts and investors. (So many people tried to log into the webcast that CB&I’s website was overwhelmed).
Shaw has contracts to install four of the reactors in China, and China has plans to install 70 of the reactors, Asherman said.
Ricchiutti said it’s true that CB&I is paying a big premium for Shaw.
Historically, the premium for an acquisition the size of Shaw — $5.9 billion in revenue during the 2011 fiscal year — is around 30 percent, Ricchiuti said.
CB&I is paying 72 percent more than Shaw was worth the day before the announcement.
But CB&I really didn’t have much of a choice, Ricchiuti said.
“CBI really wants to grow to become this next level of whatever it is they want to be. There aren’t a lot of Shaws out there,” Ricchiuti said. “I mean, this would be the company they’d have to buy.”
During the conference call, Asherman said CB&I has aspirations of becoming a $26 billion company.
The Shaw deal will take CB&I from around $5 billion in revenue to more than $11 billion combining the companies.
Shaw is near completing one major requirement for the deal to be completed, the sale of its Energy and Chemicals business to Technip on Monday.
Several others remain, including the sale of Shaw subsidiary Nuclear Energy Holdings’ investment in Westinghouse to Toshiba, set for Oct. 6, and securing Shaw and CB&I shareholders’ approval.
The Energy and Chemicals business and Westinghouse investment, which was based on Japan’s weak yen currency, have been a drag on Shaw’s earnings.
There are also a variety of governmental filings required, Shaw spokeswoman Gentry Brann said. The companies must secure the approvals of the Committee on Foreign Investment in the United States; the Nuclear Regulatory Commission; government agencies with respect to Shaw’s government contract work; and foreign antitrust regulators, including China.
Some of those approvals are related to the country where CB&I incorporated, the Netherlands. Although CB&I’s administrative headquarters are in The Woodlands, Texas, the company’s corporate headquarters are in The Hague.
e_SDLqWhile the timing of the regulatory approvals can be difficult to predict, Shaw expects to receive all of them within four to six months,” Brann said.
Asherman has said CB&I expects to complete the acquisition by the end of the year or shortly thereafter.
Although both Asherman and Shaw’s CEO emphasized the deal will increase overall employment for Shaw, or CB&I Shaw as the business unit will be known, there is a downside for Baton Rouge: no longer having Shaw as a Fortune 500 company headquarters.
“It’s hard to put a positive spin on it, I think,” economist Loren Scott said.
Jobs directly related to Shaw’s construction projects — the engineers, construction workers and project managers — are likely safe, Scott said. What’s worrisome are the prospects for the “back-office folks” — people in administrative divisions like human resources, information technology or accounting.
“One would anticipate there are economies of scale in letting those things be handled by the headquarters office in Houston rather than Baton Rouge,” Scott said.
When those jobs go away, so does the economic activity associated with them — what economists often call “the positive multiplier effect.”
Instead of jobs being created to support the administrative positions, the community will lose both the administrative and support jobs and their income, Scott said.
J.M. Bernhard Jr., Shaw’s chairman, chief executive officer and president who will retire with the CB&I deal, said he expects Shaw overall will add jobs in Louisiana over the next 12 to 36 months in everything from modular facilities to engineering offices.
Hydraulic fracturing work and natural gas liquefaction and gas-to-liquids facilities are among $40 billion worth of construction projects planned in Louisiana, Bernhard said. Shaw’s expertise in those areas and a workforce skilled in those types of projects should lead to more employment for CB&I Shaw, he said.
Of Shaw’s 27,000 workers, 4,000 are in Louisiana, with 1,000 of those in Baton Rouge.
When asked if Baton Rouge will lose some of it’s swagger along with a Fortune 500 firm’s corporate headquarters, Scott said no.
The sale won’t slow down the efforts of the Louisiana economic development department and the Baton Rouge Area Chamber to attract new industry, Scott said.
“I think people are looking at other things — the incentives that are being offered, the quality of the workforce; other things rather than the presence of a Fortune 500 company,” Scott said.
Advocate business writer Skip Descant contributed to this report
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