Todd Jacobson
WC Monitor
10/3/2014

Babcock & Wilcox confirmed this week that its Board of Directors is considering splitting its Government and Nuclear Operations business segment and its commercially focused Power Generation unit into two publicly traded companies, with B&W President and CEO Jim Ferland suggesting Oct. 1 that the move could enhance the value of the company. B&W’s Government and Nuclear Operations unit includes its Technical Services Group and is headed up by Sandy Baker. “B&W’s businesses are stable and profitable,” Ferland said in a message to employees obtained by WC Monitor. “The Government & Nuclear Operations business is a recurring business with solid earnings and cash flow. The Power Generation business is projects-driven with a recurring aftermarket services business, and has higher growth potential, particularly in international markets. The Board is evaluating whether a separation could better leverage the strengths of these two successful businesses and enhance value for shareholders.”

B&W’s work for the Department of Energy’s cleanup program, the National Nuclear Security Administration, its nuclear fuel work for the U.S. Navy and its mPower small modular reactor effort is included in its Government and Nuclear Operations segment. B&W’s earnings for the second quarter of 2014 dipped, with revenue for its Technical Services Group remaining relatively flat, but the outlook for Technical Services is bleak as the company will have to deal with the loss of its long-held Pantex and Y-12 management and operating contracts.

More Info Expected in November

B&W has brought on JPMorgan as its financial advisor and Wachtell, Lipton, Rosen & Katz and Jones Day will serve as legal advisors during the evaluation of the potential separation. More information is expected to be released when the company holds its third quarter 2014 earnings call in early November. “Through its evaluation process, the Board is assessing whether a separation could provide greater opportunities for each business to pursue priorities that are best suited for its business and customers, as well as enhance shareholder value,” B&W said in a Frequently Asked Questions document distributed to employees this week, a copy of which was obtained by WC Monitor. “The Board is fully evaluating the benefits and risks before deciding whether to pursue a separation.”

In the FAQ, B&W said it did not expect a “significant impact” on B&W’s operations if the company goes ahead with the separation plan. “Regardless of the Board’s decision, we do not anticipate any significant impact from this contemplated action on employees, customers or operations of either the Power Generation or the Government & Nuclear Operations business,” B&W said. “If there is a decision to proceed with a separation of the businesses, we would expect to maintain a presence in Charlotte as well.”

Wall Street Responds Well to Announcement

Shares of B&W stock rose $2.21, or about 8 percent, to $29.90 on Oct. 1, the day the separation plan was announced, and Wall Street analysts appeared to welcome the move. Jamie Cook, an analyst with Credit Suisse, said in a message to investors that B&W had already exhausted several options to create more value for the company, cutting costs through its Global Competitiveness Initiative, reducing spending on its mPower small reactor project, and optimizing its balance sheet. “One theme remains the same—top line opportunities are limited,” Cook said.

Move a Precursor to Companies Being Acquired?

However, Cook said separating the companies better positions both to be acquired. For B&W’s Government and Nuclear Operations business, Cook said “larger industrial conglomerates or aerospace & defense companies” would potentially be interested, with the nuclear operations segment standing out as the “crown jewel and likely underappreciated asset” of the group. “A larger/global industrial conglomerate with an interest in nuclear could fund mPower more easily, which would provide the company a call option on modular nuclear reactor technology,” Cook said. Its Power Generation unit could draw interest abroad, especially with Asian companies interested in entering the market.

B&W downplayed the potential for being acquired in the FAQ it distributed to employees. “At this point, there has not been a decision to separate the company. The Board has directed B&W management and its advisors to study the possible separation of the two businesses as independent, publicly traded companies, not a sale,” the FAQ says.

An Impact From Activist Shareholders?

B&W also acknowledged the influence of activist shareholders on the company by including a question about the impact in the FAQ, but it did not specifically say how much of a role the investors had in the decision to consider separating the companies. Earlier this year, Starboard Value LP, which owns 1.8 percent of B&W stock, successfully pushed to have former Home Depot CEO Robert Nardelli added to B&W’s Board of Directors. TheStreet.com, a stock-focused website, also reported this week that activist shareholder Blue Harbour had suggested the separation at a conference earlier this year and had been meeting with B&W since the spring. “All shareholders’ views are important,” B&W told employees. “Ultimately, it is the Board’s duty to evaluate strategic decisions such as this and make determinations based on what they believe is in the best interest of all of B&W’s shareholders.”

In a statement when it was announced that Nardelli would be added to the Board, Starboard CEO Jeff Smith said: “We believe Bob brings a fresh perspective and unique insight to the company and has the experience necessary to help B&W’s Board and management as they work toward significantly improving margins and returning capital to shareholders. We look forward to enhanced value for the benefit of all shareholders.” Starboard Value did not respond to a request for comment this week.