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McDermott Inks $6B Merger Deal With Chicago Bridge & Iron

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In a bid to create a fully-vertically integrated company, McDermott International, Inc. is set to merge with Chicago Bridge & Iron Company N.V. CBI in a $6 billion all-stock deal. 

Shareholders of Chicago Bridge & Iron will receive 2.47221 shares of McDermott for each Chicago Bridge & Iron stock they own, unless McDermott completes its 3-to-1 reverse stock split ahead of the closing, which will reduce the number to 0.82407 shares.

Subject to satisfactory closing conditions, the transaction is set to complete in the second quarter of 2018. Upon the closure of the deal, McDermott will be owning 53% of the stake in the combined company, while Chicago Bridge & Iron will hold 47% interest.

McDermott’s current CEO and president David Dickson will head the new entity which will be headquartered in Houston. McDermott’s CFO and executive vice president will continue to hold office in the combined company. The new company’s board of directors will comprise 11 members, including Dickson and five independent directors from McDermott along with five from Chicago Bridge & Iron.

Deal Rationale

Both companies provide infrastructure and other products for oil and gas industries. McDermott in particular, focuses on offshore operations whereas Chicago Bridge & Iron’s strength lies in onshore projects. The combination of the two entities will lead to the creation of a fully-integrated onshore-offshore company offering engineering, procurement, and construction and installation services to the energy sector.

Chicago Bridge & Iron has been struggling in the wake of low commodity prices generating lower revenues and earnings in the past four quarters. Shares of the company has also declined about 44% year to date. Accordingly, the company resorted to cost cut and divestment initiatives to improve the leverage metrics. While the energy infrastructure services firm is leaving no stone unturned to shore up financials, the merger deal comes at an opportune time and is surely to boost up the credentials of the company.

On the other hand, while we appreciate McDermott’s broad product portfolio, diversified geographical footprint,the company’s exclusive focus on the offshore oil and gas business amid the current commodity price scenario limits its growth. The company seeks to effectively counter this limitation with its merger with Chicago Bridge & Iron which focuses on onshore business. The increased scale and diversification will thus position the company to capitalize effectively on growth opportunities.

Deal Benefits

The merger of complementary assets will boost the revenues and expand the customer base of the new entity and lead to various commercial, operational and financial synergies. The new entity is likely to benefit from increased cost efficiencies by providing a broader set of product offerings driven by technology and innovation. The opportunity to leverage the technology through a wider distribution network provides significant growth prospects.

The combined company expects to generate annualized cost savings of about $250 million by 2019.The company is expected to have pro-forma annual revenues of about $10 billion and a robust backlog of 14.5 billion.

The merger is expected to create sustainable and profitable business model delivering best-in-class solutions for customers.

Zacks Rank and Key Picks

Both McDermott and Chicago Bridge & Iron carry a Zacks Rank #3 (Hold).

A few better-ranked players in the energy space are Northern Oil and Gas, Inc. NOG and HollyFrontier Corporation HFC. Both these companies sport a Zacks Rank #1 (Strong Buy).You can see the complete list of today’s Zacks #1 Rank stocks here.

Northern Oil and Gas posted an average beat of 175% in the last four quarters.

HollyFrontier delivered average positive earnings surprise of 8.04% in the trailing four quarters.

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