McDermott (MDR, Financial) and Chicago Bridge & Iron (CBI, Financial) have agreed to merge in an all-stock deal, which will give a new enterprise value north of $6 billion (mostly debt). Their combination will create a broad engineering, procurement, construction and installation company that generates over $10 billion in combined revenues, mostly from Chicago Bridge & Iron, and a $14.5 billion backlog -- again, mostly from Chicago Bridge & Iron.Ă‚
David Dickson, McDermott's current president and CEO, will remain in his role for the combined company.
Chicago Bridge & Iron shareholders would receive 2.47221 shares of McDermott common stock for each share of Chicago Bridge & Iron common stock owned, or 0.82407 shares if McDermott completes its planned three-to-one reverse stock split prior to closing. That said, it’s a stock deal, which are typically the worst kind for the acquired company’s owners. At the current price, that’s $16.50, which drastically underestimates the value of Chicago Bridge & Iron.
Chicago Bridge & Iron is the larger of the two engineering and construction firms by a significant margin.
Current Financials ($)
Chicago Bridge & Iron
- Revenue: $9.5 billion (TTM)
- Assets: $7.1 billion
- Debt: $2.1 billion
McDermott
- Revenue: $2.9 billion (TTM)
- Assets: $3.5 billion
- Debt: $540 million
The one difference is that McDermott has returned to profitability, something that Chicago Bridge & Iron is looking to do next year. It’s nice to want what you cannot afford. For me, that’s a mansion in Leinster, Ireland. For shareholders of McDermott and Chicago Bridge & Iron, this is a merger they cannot afford.
According to the terms, McDermott shareholders would own roughly 53% of the combined company, as the companies expect the deal to be cash accretive, excluding one-time costs, within the first full year after closing, also helping them reduce costs by an additional $250 million in 2019.
Both companies are likely to benefit from the new tax bill, which lowers the corporate rate to 21%, as well as from any new government spending on infrastructure. The Trump administration is looking to release a proposal to upgrade roads, bridges, airports and other public works before the State of the Union address on Jan. 30. By the time the roll out starts, McDermott and Chicago Bridge & Iron will both be in a very good position to capitalize on the possible $1 trillion in spending.
Together, the entity is more likely to further growing its backlog, but a couple of things come to mind. One, maybe CBI wasn’t on track to post a profit in 2018 after all and needed a deal with a profitable competitor. Two, McDermott may see an opportunity to tack on a billion dollars in gross profit annually, and its management is better able to turn that into net income than Chicago Bridge & Iron.
From a capitalization perspective, McDermott is on better footing, which is definitely giving it strength to pursue this deal. Yet, if analyst are right, Chicago Bridge & Iron’s revenue and profit will make up over 75% of the combined company’s financial performance. Yet, McDermott shareholders will get the lion’s share of the firm. At this point, it would be almost better to own McDermott ahead of the closing, but I'm not convincd it will end in a solid long-term growth.
Disclosure: I am not long/short McDermott or Chicago Bridge & Iron.
