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CB&I Drops Most in 11 Months on $3 Billion Shaw Purchase

Chicago Bridge & Iron Co. fell the most in almost a year after agreeing to buy Shaw Group Inc. for about $3 billion as the energy construction and engineering company expands its nuclear building services.

The shares tumbled 14 percent to $34.94 at the close in New York, the steepest drop since Aug. 8. Shaw’s 55 percent gain to $41.49 was still short of CB&I’s $46 cash-and-stock offer, 72 percent more than the July 27 closing price.

“This is a big change in strategy” for CB&I, Chase Jacobson, a William Blair & Co. analyst in New York, said in a telephone interview. He said CB&I, based in The Hague, had described its approach to acquisitions as being focused on smaller targets, “not more than doubling or almost tripling the company’s backlog and diversifying the entire company.”

Buying Shaw will widen CB&I’s role in the building of the first new nuclear reactors approved in the U.S. since 1978. Long plagued by cost overruns, regulatory hurdles and environmental concerns, the industry was dealt a fresh setback when reactors at Japan’s Fukushima plant melted down after a 2011 earthquake.

CB&I’s offer consists of $41 in cash and 0.12883 share for each share of Baton Rouge, 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, according to a company statement that didn’t give the period on which that figure was based.

Deal Valuation

The deal values Shaw at about 26 times earnings before interest, taxes, depreciation and amortization, according to data compiled by Bloomberg. The median paid in a survey of more than 40 similar engineering takeovers over the past decade was about 8.3 times Ebitda, the data show.

“It’s a pretty healthy price relative to trading values over the last couple of months,” Michael Dudas, a New York-based analyst at Sterne Agee & Leach Inc., said in a telephone interview. “I’m sure that’s something people are trying to get their arms around as well.”

Shaw had fallen 0.8 percent this year through July 27, while CB&I, which keeps administrative offices in The Woodlands, Texas, had gained 7.7 percent.

Both companies are counting on a nuclear renaissance that has yet to materialize and, as construction partners of the first new atomic plants in a generation, risk penalties if the projects repeat the ballooning costs and extensive rework suffered by U.S. nuclear construction in the 1970s and 1980s.

‘Very Satisfied’

“We’re very satisfied, through a very thorough and comprehensive due diligence, that the nuclear projects are performing as we’re expecting,” CB&I Chief Executive Officer Philip K. Asherman told analysts on a conference call. “They are well on their way to resolving issues on projects they’ve reported as having cost challenges.”

CB&I said the combined company will be one of the world’s largest energy-construction and engineering-contracting firms, with a work backlog of more than $28 billion. The acquisition will boost 2013 earnings by at least 10 percent, and Asherman will be CEO of the combined company, CB&I said.

“There’s burgeoning growth in capital investment in the U.S. for energy that CB&I wants to get better exposure to,” said Dudas, who rates the company as a buy. “That’s one of the reasons they wanted to do this.”

The deal is the biggest of 79 construction and engineering acquisitions announced in the U.S. this year, according to data compiled by Bloomberg. The average premium of the deals was 10.6 percent. CB&I said it will use about $1.9 billion in debt to finance the deal, along with cash from each company.

Shaw’s BBB- credit rating, the lowest investment grade, may be reduced, Standard & Poor’s Ratings Services said in a statement.

New Reactors

CB&I and Shaw are part of the group constructing the first new reactors in the U.S. since the Three Mile Island nuclear disaster in 1979. Shaw is managing the projects along with Toshiba Corp.’s Westinghouse Electric Co.

Shaw is “very early in the two big nuclear projects they’re building,” said William Blair’s Jacobson, who rates the stock as market perform and recommends CB&I as outperform. “It’s yet to be seen what the future of those projects are, let alone the nuclear industry in the U.S. in general.”

Shaw is building modules that will form the next-generation nuclear reactors, while CB&I has a contract to fabricate and assemble the concrete-and-steel buildings that will house those units. The Alvin W. Vogtle Electric Generating Plant near Augusta, Georgia, and Virgil C. Summer Nuclear Station outside Columbia, South Carolina, are months behind schedule because of federal licensing delays.

Southern’s Complaint

Southern Co., the largest investor in the Vogtle project, is contesting more than $800 million in new project costs resulting from the delay, Chairman and CEO Thomas Fanning said in an interview last week.

Vogtle may face further delays and cost overruns as Atlanta-based Southern and its construction partners work to smooth supply-chain kinks, William Jacobs, an independent construction monitor for that project, said in a May 30 report to the Georgia Public Service Commission.

Shaw has struggled to meet quality standards and “has not yet demonstrated the ability to meet the required production rate of high quality modules needed to support the project schedule,” according to the report.

CB&I’s purchase is expected to close during the first quarter of 2013, Shaw said. The transaction requires approval from shareholders of both companies and regulators.

Shaw Backlog

At the end of May, Shaw had a backlog of $18.2 billion, with about half coming from its power unit. Shaw had $835 million of total adjusted cash, including restricted short-term investments, at the end of May, according to a presentation.

“We’ve got a great backlog in front of us on the nuclear jobs,” Asherman said.

Energy-related construction is a CB&I specialty. CB&I formed a joint venture in 2011 with Kentz Corp. of London to build an LNG facility at the Gorgon project on Barrow Island, Australia. The contract value is more than $2.5 billion, according to CB&I’s quarterly report.

The company also has a $2 billion joint venture with Clough Ltd. to build pipelines, processing plants and other infrastructure for an LNG project in Papua, New Guinea.

Shaw received financial advice from Morgan Stanley, while Vinson & Elkins LLP and Jones Walker Waechter Poitevent Carrere & Denegre LLP served as legal advisers. Bank of America Corp. acted as the financial adviser to CB&I, and Wachtell, Lipton, Rosen & Katz acted as the company’s legal counsel.

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