Cheapest Infrastructure Stock Seen in Bid War: Real M&A

Traders are convinced Michael Baker Corp., which has the cheapest valuation relative to its cash generation among U.S. infrastructure construction companies, will receive a higher takeover offer.

Michael Baker has closed above last month’s $24.25-a-share bid from DC Capital Partners LLC every day since Dec. 27, with the premium widening to a record 4.7 percent last week, according to data compiled by Bloomberg. The provider of engineering services ousted its chief executive officer in December and this month said it would consider strategic alternatives and named a new chairman.

The company, down 52 percent since peaking in 2007, has a higher free-cash-flow yield than any other U.S. infrastructure construction stock valued greater than $100 million, according to data compiled by Bloomberg. It would be worth more in the hands of an acquirer, which may end up paying at least $30 a share, Crescendo Partners and D.A. Davidson & Co. said. Other potential bidders include Fluor Corp. and Jacobs Engineering Group Inc., according to KeyCorp.

“It’s a company with a great reputation in the industry, and the company is very undervalued,” Arnaud Ajdler, a New York-based senior managing director at Crescendo Partners, which owns shares of Michael Baker and wrote a letter in December to the company’s board supporting a sale, said in a telephone interview. “A strategic buyer would likely be willing to pay a lot more than what the stock is trading at.”

Alaska Pipeline

David Higie, a spokesman for Moon Township, Pennsylvania-based Michael Baker, declined to comment on the company’s takeover prospects. Founded in 1940, Michael Baker provides engineering services to clients including the U.S. government. Past projects for the company, which has more than 3,000 employees, include the Trans-Alaska Pipeline.

After the shares closed at $19.11 on Dec. 13, down from a 2007 peak of $52.79, the company said its board asked CEO Bradley L. Mallory to resign. Less than a week later, DC Capital proposed merging Michael Baker with KS International LLC, a provider of engineering services to the U.S. government that’s controlled by the private-equity firm. DC Capital, which is also a Michael Baker stakeholder, offered $24.25 a share in cash.

Michael Baker’s “long-term growth strategy has resulted, and I believe will continue to result, in a significant undervaluation of the stock,” DC Capital’s Thomas J. Campbell wrote in a Dec. 19 letter to the board. That day, Michael Baker said it would review the proposal.

Numerous Suitors

On Dec. 26, Crescendo Partners endorsed a takeover, saying in a letter to the company that “we believe numerous parties would be interested” and that a strategic buyer would probably pay a “significant premium.” Crescendo, which estimated Michael Baker could get more than $30 a share through a sale, said it would nominate directors if the company didn’t pursue a deal. The shares have closed above $24.25 every day since Dec. 27, rising 1.6 percent on Jan. 17 after Michael Baker said Chairman Richard L. Shaw will retire this month.

“People think it’s worth more, just based on the trading,” Bill Popper, a Jersey City, New Jersey-based managing director and arbitrage trader at ICAP Plc, said in a phone interview. “It’s staying above the bid.”

Today, Michael Baker shares lost 0.4 percent to $25.28.

Crescendo’s Ajdler said a deal at more than $30 a share would be a “terrific price.” D.A. Davidson’s John Rogers said Michael Baker, which closed at $25.38 yesterday, could get that.

Unsatisfied Board

“A change in the management would at least indicate that the board is not satisfied with where the company is,” Rogers, a Lake Oswego, Oregon-based analyst at D.A. Davidson, said in a phone interview. “Any time you’ve got a vacancy at the CEO spot, you’ve got potentially shareholders that are activists, if you add those things together, then the possibility of something happening is higher.”

Michael Baker’s free-cash-flow yield amounts to 8.2 percent, higher than the nine other U.S. infrastructure construction companies valued at more than $100 million, data compiled by Bloomberg show. The group average is 1.8 percent.

“The work it does can directly convert that into free cash flow with limited losses,” Tahira Afzal, a New York-based analyst for KeyCorp, said in a phone interview. “That means it’s got a very good free-cash-flow model.”

Potential bidders for Michael Baker include Fluor, Jacobs Engineering, Aecom Technology Corp., URS Corp. and Stantec Inc., the analyst said.

Poison Pill

Keith Stephens, a spokesman for Fluor; Aecom’s Paul Gennaro; and Pamela Blum, a representative of URS at Sard Verbinnen & Co., declined to comment on whether their companies are potential buyers. Jacobs Engineering’s Michelle Jones and Stantec’s Alison Smith didn’t respond to requests for comment.

This isn’t the first time Michael Baker has faced an investor’s desire for change. Starboard Value LP sent a letter to the company in August 2011 pressing for operational changes. While Michael Baker several months later terminated its poison pill, making a takeover easier, the company hasn’t yet agreed to a deal. A transaction may not be imminent, D.A. Davidson’s Rogers said.

Still, Michael Baker is attractive and may receive takeover interest.

“It’s a very good business model, and under the right hands and as part of a larger company, there is more value that can be extracted,” KeyCorp’s Afzal said.

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