F Ross Johnson: Well, that LBO stuff is way over my head. I just can’t follow it, Henry.
Henry Kravis: You don’t have to. Bankers and lawyers work it all out.
F Ross Johnson: All I want from bankers is a new calendar every year and all I care about lawyers is they’re back in their coffins before the sun comes up
Barbarians at the Gate
“Through all the machismo, through all the greed, through all the discussion of shareholder values, it all came down to this: John Gutfreund and Tom Strauss were prepared to scrap the largest takeover of all time because their firm’s name would go on the right side, not the left side, of a tombstone advertisement buried among the stock tables at the back of The Wall Street Journal and The New York Times.”
For Chicago Bridge and Iron I am reminded of Danny DeVito (Other People’s Money):
Because have a look at the McDermott share price:
McDermott shares closed on Friday night at 6.05 and then Subsea 7 announced their bid and they have closed tonight at the price Subsea are bidding at… which means “the market” thinks it is going to happen, and maybe at a higher price. Only the details and human factors need to be filled in now.
Over 70m MDR shares changed hands today when the daily average is 10.8m. The share price up 15% in a day. MDR only has 286m shares on issue so well over 25% of the company changed hands today. You can be sure that the institutions buying these shares didn’t buy them as a long term investment strategy to back a company that run boats-and-barges to buy a bridge-building company (not that CB&I really builds bridges I just liked the alliteration). These shareholders are hedge funds, many of whom run merger arbitrage funds, and they want their $7 in cash, and hopefully more if Saipem can man up and launch a counter bid,
The only people selling shares didn’t believe in the merger and are getting out without taking the deal execution risk, and the people holding on want Subsea 7 shares as well as cash so they can keep some of the upside. This is a very hard dynamic for MDR management and advisers to reverse.
Right now some of the best minds at Goldman Sachs, McDermott’s lead financial adviser, are trying to work out how to fend off the Norwegians… and it is not easy because tomorrow the largest of these new investors (and some of the old) will start calling the Chairman, and probably Phillppe Barrill (a Director from SBM and seen as independent), and demand McDermott start talks immediately with Subsea 7 and ditch CB&I. Some of these funds are relatively aggressive. I have no idea about the legal situation here, and tonight some very expensive lawyers will do an all-nighter documenting it, but the fact remains the size of the shareholding change means Subsea 7 is already in the lead in this race.
The MDR/CBI merger always had a weak strategic logic and rationale. Whereas the Subsea 7 one is excellent from both a cost saving and growth perspective. Drop the pipelay spread on the Amazon for example, and assume higher utilisation on the new Subsea 7 newbuild, and you have saved $75m in CapEx and maybe $10m in cost/revenue synergies alone. Subsea 7 can afford to pay more here and Goldman will come under pressure from some shareholders to get them a higher price, which will split them from the management team who hired them. Expect the Board to have to hire another financial adviser tomorrow (a CYA move) who will be paid a success fee on a transaction occurring not just the CB&I one. Think of the cost savings from one organisational structure? Combine the Middle East and Africa powerhouse of MDR with the Subsea 7 SURF and deepwater business? This will be the deal of the downturn and I struggle to see how such an irrefutable commercial logic can be ignored. Hardly an original thought as the MDR share price shows.
Or MDR shareholders could take a chance management can turnaround CB&I? For the fund managers whose Christmas bonus depends on a valuation in 8 months time they will take the $7 a share today rather than risk a declining price in a few months.
Expect some real fireworks this week if MDR push on without opening talks with Subsea 7.
CB&I can look to Gregory Peck:
I’d love to know if this was the plan all along? Years ago P&O Cruises wanted to merge its cruise business with Carnival but wasn’t sure how to get them to pay the price they wanted? So P&O opened merger talks with Royal Carribean, and agreed a $63m break fee, then Carnival came running and Royal Carribean were ditched (the break fee was worthwhile in the greater deal economics). And it was always the plan from the bankers that this would happen.
I don’t think this is the case here. I am not close to it but I get the feeling that MDR really want to be independent and the CB&I deal was about ensuring that not getting the best price for shareholders. But they have achieved the same thing regardless.