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Chicago Bridge & Iron, McDermott Sign $6B Merger Deal

Chicago Bridge & Iron Company CBI and McDermott MDR have agreed to merge in an all-stock deal worth about $6 billion, creating an extensive engineering, procurement, construction and installation company amid a stabilizing global oil market, with $10 billion in combined revenues and an impressive backlog of $14.5 billion. The deal is expected to conclude in the second quarter of 2018.

Per the terms of the deal, McDermott’s shareholders will own 53% of the new, combined company, while Chicago Bridge & Iron shareholders would own the remainder. The shareholders would receive 2.47 McDermott shares for each Chicago Bridge & Iron share owned, or 0.82407 shares if McDermott initiates a planned three-to-one reverse stock split prior to the conclusion of the deal.

The deal is expected to be cash-accretive (excluding one-time costs) within the first year after it is concluded. Both companies expect to generate annualized cost synergies of $250 million in 2019 and sizeable revenue synergies. This is in addition to Chicago Bridge & Iron’s $100-million cost-reduction program.

This Zacks Rank #3 (Hold) company’s shares have lost 49% of value in the past year, in stark contrast to the industry ‘s gain of 3.7%. The company has missed the Zacks Consensus Estimate for earnings by an average of 149.7% over the trailing four quarters, and also lagged revenue estimates during the same time frame. The company has been plagued by formidable headwinds since the crash in oil prices and has taken aggressive measures to shore up its finances.

Chicago Bridge & Iron also intends to sell its crown jewel Technology licensing business, and implement a comprehensive corporate and operating cost-reduction program. With slumping revenues, bleak guidance, distress sale of a key operating unit and the need for extreme strategic action, the future looked exceedingly uncertain for Chicago Bridge & Iron.

McDermott, on the other hand, has benefited from a flurry of contract wins in the Middle East, including from Saudi Aramco. The opportunity to merge with McDermott came when Chicago Bridge & Iron pursued the sale of its Technology and former Engineered Products businesses. The deal includes the technology business.

The combined company will be completely vertically integrated, and offer end-to-end engineering, procurement, construction and installation (EPCI) services to the onshore and offshore energy sectors.

McDermott primarily focuses on offshore operations, while Chicago Bridge & Iron’s strength is in onshore projects. The deal will, thus, integrate two highly complementary businesses and create a leading onshore-offshore EPCI company, with immense scale and diversification to capitalize on global growth opportunities.