Denali Investors Sends Letter to The Shaw Group (SHAW) Board of Directors Demanding Appropriate Premium for Shareholders; CBI's Offer is Inadequate

Aug 13, 2012, 21:32 ET from Denali Investors, LLC

NEW YORK, Aug. 13, 2012 /PRNewswire/ -- The following is a letter from Denali Investors to The Shaw Group (SHAW) Board of Directors demanding an appropriate premium for shareholders.


August 10, 2012

To The Shaw Group Board of Directors:

We believe the true value of your company, hidden by temporary optical factors, to be far in excess of the $46 per share offer by Chicago Bridge & Iron (CBI). In our view:

  1. An independent SHAW could have reached a $50 to $70 per share valuation in 2013.
  2. CBI is not paying a fair value, much less an appropriate premium.
  3. SHAW must seek an appropriate premium in line with precedent transactions.
  4. We will pursue all options to help realize full value for shareholders.

We believe there is tremendous value being left on the table by the SHAW Board. It would seem that SHAW shareholders may rightly conclude that CBI has completely out-negotiated the SHAW Board and its advisors.

First, the sale of the problem E&C segment removes the operational and financial volatility and overhang from the past several years. A clean and stable company is about to emerge out of what appeared to be seemingly volatile operations. The $300m cash deal is set to close next month.

Second, the $1.7b phantom "debt" related to Westinghouse will be put back to Toshiba by the end of Q1 2013. This unwind will have a tremendous pro forma impact on every financial metric and financial statement. Even now, most supposed analysis of SHAW and the merger fail to correctly back out pro forma effects and instead rely on highly misleading standard GAAP numbers. The misperception of SHAW in the market remains deep and persistent, despite the fact you have telegraphed these changes for some time.

Third, there has been a perfect storm in nuclear as well as natural gas. It seems that the markets are applying limited and linear thinking in their conclusions and decisions about the investability of these industries. Those that believe natural gas will be permanently low forget that natural gas is the number one most volatile commodity in the last decade. Similarly, those that believe nuclear will become irrelevant forget that nuclear remains a vital and strategic component of our energy complex.

These misunderstandings have resulted in SHAW's post-announcement price dropping to $38 per share to the current $40.50, which represents a 13% spread and a 21% annualized return. The current price remains far below the $46 offer, of which $41 is cash consideration and $5 is CBI stock consideration.

On the CBI call on July 30, 2012, CBI's CEO Philip Asherman stated CBI is paying 7x EBITDA for SHAW. This is misleading at best. CBI's stated 7x is actually only 5x, pro forma, to 4x, assuming modest ramp of core segments as expected. Including modest synergies, the price amounts to only 3x EBITDA. Given precedent transactions at 6x to 10x, we believe SHAW deserves at minimum a mid-range valuation multiple. Indeed, our initial skepticism of CBI's low offer was confirmed after reviewing the presentation released by CBI on August 9, 2012 in which their valuation materials reveal an effective acquisition price of only 3x EBITDA for 2013 including synergies.

Therefore, a clean SHAW with $340m in 2013E EBITDA before synergies and a pristine balance sheet remains at a substantial discount. With the deal announced just before an unencumbered SHAW would have emerged at the beginning of 2013, SHAW shareholders will not be able to participate commensurately in the performance improvement. Every turn of 2013E EBITDA equates to roughly $5 per share. Based on comparable transactions, 7x to 9x is a more fair and acceptable range, which results in $56 to $66 per share.

Due to the prolonged optical misunderstanding surrounding SHAW as well as the deal itself, the market is not asking basic questions, such as why it seems SHAW actions since the deal announcement are out of character with steps it has taken in the past. I would expect that an old hand such as Gary Graphia, having been instrumental in so many SHAW transactions, would have followed the same playbook when he was hired back as a consultant only three months ago in May 2012. Typically, SHAW holds a conference call, but has not since this deal was announced. Typically, SHAW releases presentation materials, but has not since this deal was announced. So far, ten days after the announcement, SHAW itself has only shared a short press release. We believe this behavior is highly out of character with a SHAW team that traditionally has engaged in far more communication on deals.

Therefore, we are left to wonder about the process at SHAW and if the process was managed properly on behalf of SHAW shareholders. Answers that are not forthcoming from the company include whether there was a proper competitive process or whether other potential acquirers were engaged or considered.

We believe higher offers are merited and probable given the exceedingly low price of the current offer. We demand that the SHAW Board seek an appropriate premium for the acquisition of SHAW and we will pursue all options to help realize full value for shareholders.


H. Kevin Byun


SOURCE Denali Investors, LLC