Updated with additional analyst comments and information throughout
NEW YORK ( TheStreet) -- The stakes are rising in engineering mergers after energy-focused industry specialist Chicago Bridge & Iron (CBI - Get Report) said it will buy Shaw Group (SHAW), a manufacturer of building equipment for oil companies and utilities, at a premium of more than 70% in a cash-and-stock deal worth $46 a share or $3.04 billion.
With the deal, Chicago Bridge & Iron will more than double its annual revenue and help transform it into one of the largest energy construction and engineering companies in the world. The move may also target a new cycle of capital spending by oil giants, nuclear energy companies and utilities, and follows other large deals in 2012 to bolster energy-operations.
As of 2011, CB&I reported revenue of less than $5 billion, while Shaw had sales of $6 billion, a drop from past years when revenue exceeded $7 billion.However, the acquisition also comes with risk. Shaw Group lost $175 million last year, while CB&I reported a $255 million 2012 profit. Some of Shaw's recent struggles come from a push into the nuclear energy sector, culminating in 2008 when it and Westinghouse were contracted by Southern Company (SO) to build the first new commercial nuclear plants in the U.S. in more than 30 years. The outlook for nuclear energy has subsequently dimmed after a March 2011 earthquake in Japan highlighted the risks of nuclear plants. In early trading Monday, Shaw Group surged 59.6% to $42.59, a four-year high, while CB&I fell 12.3% to $35.70. "We think a key question investors will have is how CB&I is getting comfortable with Shaw Group's nuclear and other execution risk," wrote UBS analyst Steven Fisher in a Monday note to clients. Fisher also noted that the deal could stoke M&A expectations in energy-focused engineering companies. After successfully integrating the assets of Lummus Global from ABB (ABB) at a valuation of nearly $1 billion in 2007, Lazard Capital Markets analyst Will Gabrielski said that acquiring Shaw Group's more cyclical earnings could be a larger deal to handle. CB&I's premium valuation, "was due to investor recognition of the company's successful integration of the acquired Lummus assets and resulting smoother earnings stream created from a more recurring, higher than industry average margin profile," wrote Gabrielski in a note to clients. "Shaw, on the other hand, has a history of lumpier results that we believe would add risk to CBI's consistent