CB&I (CBI 16.56, -1.36 -7.6%) and McDermott (MDR 6.88, -0.71 -9.4%) last night announced a merger deal which would combine the two companies to create a multi-national onshore-offshore company, with engineering, procurement, construction and installation service offerings. On the valuation front, the estimated enterprise value of the transaction is about $6 billion, based on the closing share price of McDermott on December 15, 2017. Following completion of the deal, the combined company will be headquartered in the Houston area.
On a pro forma combined basis, the combined McDermott and CB&I would have collective revenues of about $10 billion and a backlog of about $14.5 billion. Additionally, the combined company is expected to generate EBITDA growth and strong free cash flow, enabling it to rapidly de-lever.
Upon completion of the transaction, McDermott shareholders will own about 53% of the combined company on a fully diluted basis and CB&I shareholders will own about 47%. The deal also includes CB&I’s Technology business and former Engineered Products business, for which CB&I has obtained from its lender group various amendments to its debt covenants.
By retaining CB&I’s Technology business, with its 3,000 patents and patent application trademarks and more than 100 licensed technologies, the combined company will hold a large position for the licensing of process technologies.
Per the deal terms, CB&I shareholders will be entitled to receive 2.47221 shares of McDermott common stock for each share of CB&I common stock owned (or 0.82407 shares if McDermott effects a planned three-to-one reverse stock split prior to closing), subject to any withholding taxes.
The management structure will remain somewhat familiar as David Dickson, current President and CEO of McDermott, will be President and CEO of the combined company, and Stuart Spence, current EVP and CFO of McDermott, will be EVP and CFO of the combined company. Patrick Mullen, President and CEO of CB&I, will remain with the combined company for a transition period to ensure a seamless integration.
Further, the deal will unite McDermott’s established presence in the Middle East and Asia with CB&I’s robust operations in the United States, and the deal will allow customers to benefit from enhanced exposure across end markets which include refining, petrochemicals, LNG and power.
On a final note, the transaction is expected to be cash accretive, excluding one-time costs, within the first year after closing. It is also expected to generate annualized cost synergies of $250 million in 2019. This is in addition to the $100 million cost reduction program that CB&I expects to have fully implemented by the end of 2017. The cost synergies are expected to come from operations optimization, G&A savings, supply chain optimization and other related cost savings. Further, McDermott and CB&I expect that the transaction will lead to substantial revenue synergies due to the enhanced capabilities of the combined company.