Shaw: Backdoor to Chicago Bridge

by Vivian Lewis, editor Global Investing

Chicago Bridge & Iron Co. N.V. (CBI) is the most improbably-named ADR out there. And here, we are suggesting an oddball, backdoor way to buy this stock.

The global engineering and construction group is incorporated in the Netherlands, where it was founded by Chicagoan Horace Horton in the late 19th century after he merged his Chicago firm with a competitor from Kansas City.

It has $6 billion in sales annually and lost money last year. It started out building bridges and diversified into bulk liquid storage for oil and water, and other steel welded goods.

More recently, CBI has developed energy-related technology like the double-walled LNG tank, shale gas treatment devices, nuclear reactor containment buildings, and thermal energy storage tanks. Its offshore status is helpful in areas like the Middle East where it does a lot of business.

Being offshore also enabled CBI to go shopping; it bought Lummus from Swedish-Swiss Asea Brown Boveri 5 years ago and last month announced a planned takeover of The Shaw Group (SHAW) for just over $3 billion subject to shareholder and regulatory approvals.

SHAW is also in the engineering and construction business with specialties in energy as well as environmental decontamination.

SHAW reported a negative earnings surprise right before the bid hit; it had a loss of 9 cents per share in the June quarter vs a consensus positive expectation of 58 cents.

The market apparently doesn't believe the CBI bid will go through despite the SHAW board voting for it. Hence there is a discount in the SHAW price from the CBI offer of 0.12883 of its shares plus $41 per share of SHAW, worth a total of $45.76.

And a major shareholder in SHAW, the closed-end Denali Fund, wrote to the Shaw board saying the price should be more like $50-70 per share, representing, it says, a p/e ratio of 7 to 9 times earnings.

The usual gaggle of class action lawyers are also on the case. BB&T, the US regional bank, has down-rated SHAW to hold from buy on the bid.

SHAW is moderately smaller than CBI but both are small enough to avoid regulatory hassles, I think. The issue is valuation.

I think that the USA is going to have to finance more infrastructure investments not only in the energy sector where both companies are active, but also back in those bridges.

So I am interested in the sector. I paid $40.50 per share for SHAW hoping to buy CBI via the backdoor. And maybe we will see a higher bid.

Learn more about this financial newsletter at Vivian Lewis' Global Investing.

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