CB&I Goes All-In on Big Energy With $3B Shaw Deal (Update 1)

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) 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 earnings ," he added, in a note that also highlighted few details on expected synergies after the deal is completed.

Under the terms of the merger, CB&I will acquire Shaw for $46 a share in cash and stock. Shaw's shareholders will receive $41 in cash and $5 in CB&I equity -- 0.12883 of the company's shares based on stock price of $38.81 -- for each Shaw share. CB&I said the deal will add to 2013 earnings per share, but didn't specify the size of the benefit in a press release.

"We expect that this will drive other E&C stocks deemed to be attractively valued and with healthy balance sheets higher today," said Fisher of UBS, highlighting Foster Wheeler ( FWLT), McDermott International ( MDR) and KBR ( KBR). The analyst also noted Willobos Group ( WG) as benefitting from Monday's deal, in spite of balance sheet pressures.

After the merger closes, which is expected in the first quarter of 2013, CB&I said it plans to operate Shaw as a business sector under the brand name CB&I Shaw to enable the company to retain Shaw's brand equity and benefit from both companies resources, capacity and operating practices.

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