For richer or poorer
|While CBI&I's bid for Shaw has spurred a lawsuit, some analysts say justice has been served with a fair price.|
When CB&I announced its intention July 30 to buy The Shaw Group at 72% over the previous business day's market value, Wall Street was not impressed, and CB&I's stock price took a dip. Analysts, for the most part, seemed to think the company formerly known as Chicago Bridge & Iron paid too much for Baton Rouge's only Fortune 500 company.
More recently, there's been a bit of a backlash to the backlash, as some observers came around to the idea Shaw might actually be worth the $3 billion investment. Meanwhile, several Shaw shareholders have sued to halt the sale, claiming they're getting shortchanged for the benefit of Shaw founder Jim Bernhard and other top executives.
So which is it? Did CB&I overpay or underpay? Or did they pay just the right amount? Come to think of it, how does anyone set a value for anything?
“The price is the price,” says local portfolio manager Andy Anderson. “Whatever someone is willing to pay is what it's worth.”
CB&I President/CEO Philip Asherman says Shaw is a leader in the industries it serves. He says the acquisition is intended to “create a combined organization that will be unique in its ability to respond to the growing demand for energy infrastructure throughout the world.”
A defensible argument can be made that CB&I paid too much, says Randy Bhatia, an analyst for Capital One Southcoast who follows both companies. Public shareholders of Shaw stock would receive $41 in cash per share and $5 in CB&I equity. The day before the announcement, Shaw was trading at only $26 and hadn't been over $40 in years.
For a deal this size, the typical premium is about 20% to 30%, says Peter Ricchiuti, a finance professor at Tulane University.
“The shareholders certainly got a rich price,” Ricchiuti says. “I could see CB&I's shareholders being up in arms, thinking they overpaid, but I can't imagine shareholders from Shaw Group thinking they underpaid.”
On the other hand, if you look at Shaw's projected earnings, the deal seems more reasonable, Bhatia says. Shaw has two large nuclear projects underway in South Carolina and Georgia, and the profit margins are said to be north of 10%.
“As those projects ramp up, those higher margins will become a bigger part of their story,” Bhatia says. “They're projected to have a better year.”
The positive projections fuel contentions that the sale price does not reflect the company's long-term value. On Sept. 24, Baton Rouge District Court Judge Wilson Fields consolidated five suits by Shaw shareholders seeking to block the sale. As one of the class actions puts it, the deal “was arrived at via an unfair process at an unfair price, all in violation of the [Shaw] board's fiduciary duties to Shaw's public shareholders,” adding that, at the end of May, “Shaw had a backlog of $18.2 billion, and $835 million of total adjusted cash.”
“It's not as though it's a state secret that the company will be doing better two to three years from now,” says David Wissbroecker, a San Diego-based attorney working with a Hahnville law firm on one of the class actions. “But it's the way the financial analysis was conducted, to not give the company much weight for those out years, that reduces the valuation for the company overall.” Wissbroecker doesn't have an alternate estimate of Shaw's true value, but litigation creates opportunities to get the needed information, he says.
The interests of directors and executive officers of public companies aren't necessarily always aligned with those of the rest of the company's shareholders. Shaw Group founder, chairman and CEO Jim Bernhard can't sell all his vested shares without tanking the company's value, but selling the whole company to CB&I gives him and other top executives the ability to cash out quickly. Bernhard, who is slated to collect more than $36 million in transaction-related compensation alone, according to an SEC filing, is expected to retire from the business when and if the deal closes.
The suits point to the accelerated monetization of top executives' holdings and change-of-control severance payments, among other factors, to argue the deal delivers benefits to management not available to other shareholders. Denali Investors, a New York-based fund, has accused Bernhard of wanting to sell now so he can prepare to run for governor or the U.S. Senate.
“This deal offers an attractive 72% premium,” Shaw spokeswoman Gentry Brann says in a statement released in response to Denali's accusation. “We firmly believe the transaction with CB&I is in the best interest of and creates significant value for Shaw's shareholders as well as our employees and customers.”
Plaintiffs also take issue with deal protection provisions that allow CB&I to match competing bids and require penalties for backing out. The contention is that those provisions essentially shut down potential competitors that might drive up the price.
But similar protections aren't unusual in acquisitions like this one, notes Glenn Morris, an LSU Law professor. No one wants to be a stalking horse, investing time and money in a complicated transaction only to have the deal stolen out from under you.
Litigants in Delaware courts, Morris says, often will argue about deal protection provisions. He says “the real wild card in this litigation” is that most of the law related to the duties of management to shareholders of publicly traded companies was developed in Delaware, where many of the nation's largest companies are headquartered.
“There's no law dealing with mergers among publicly traded companies in Louisiana courts,” Morris says. “The question is whether a Louisiana court would follow Delaware authority on these kinds of issues.”
The boards of both companies have signed off on the transaction, which is subject to shareholder approval. Bhatia, who like many observers initially was skeptical the deal would go through, now expects approval early next year, and says the conventional wisdom seems to be moving in that direction. He says CB&I seems to be doing a good job marketing the transaction to its shareholders. CB&I only needs a simple majority, while Shaw needs a 75% supermajority to approve the deal under Louisiana law.
Given that monetary value, like beauty, is in the eye of the beholder, we can expect plenty of discussion in the months to come about how much The Shaw Group is worth, by shareholders, on Wall Street, and in a Baton Rouge courtroom. Anderson, the local portfolio manger, doesn't have much interest in Shaw, be it over- or undervalued; he's more of a tech guy.
But he has a pretty good idea of what he would do if he owned Shaw stock: “I think I would just take my money and run."
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