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UPDATE 3-Engineer McDermott to split in two; shares jump
* To spin off its B&W business
* Shares jump 11 percent (Adds analyst comments, byline)
By Steve James
NEW YORK, Dec 7 (Reuters) - U.S. engineering company McDermott International Inc (MDR.N) plans to split into two publicly traded companies in a move partly aimed at limiting the risk of missing out on lucrative U.S. government contracts.
The company's announcement on Monday sent its stock up 11 percent on the New York Stock Exchange as investors viewed it as a positive move.
McDermott said the split will be achieved through a spin-off of its Babcock & Wilcox (B&W) unit, which supplies nuclear components for U.S. government defense programs and also operates nuclear facilities.
McDermott's other business, to be renamed J. Ray McDermott S.A., is focused on offshore energy infrastructure, and its customers are predominantly utilities and major oil companies.
"This is potentially positive news," said Steve Fisher, an analyst with UBS. "The transaction makes sense given the longer term nature of the growth outlook for the power business (which could be years), which in the near term could drag down the growth opportunities of the offshore business.
"Also, the separation could open the door to M&A possibilities for either business," Fisher wrote in a note.
Graham Mattison, at Lazard Capital Markets, said the split would remove risk posed by recent modifications of Federal Acquisition Regulations, which prohibit federal agencies from awarding new contracts to "inverted" companies which are based overseas and have U.S. subsidiaries. McDermott International, the parent company, has headquarters in Panama.
"While management noted that the new FAR rules have not had any significant impact on the company's operations or profitability to date, future bidding opportunities could be negatively impacted," Mattison wrote.
He said government operations account for about 15 percent of McDermott's revenues.
The spin-off is intended to be tax-free to shareholders of McDermott. Following completion of the split -- expected in nine to 12 months -- shareholders will own 100 percent of two separate companies, B&W and J. Ray.
In its announcement, the company said one benefit of splitting in two was "elimination of the risk posed by recent modifications in the rules under the Federal Acquisition Regulations that limit the U.S. Government's ability to contract with 'inverted' companies and their subsidiaries."
If McDermott did not spin off B&W "it would make it more challenging to win U.S. government work," said Will Gabrielski, an analyst with Broadpoint Amtech in Connecticut. By splitting into separate companies, "they would no longer be under the McDermott umbrella."
Gabrielski also said the current structure of the company makes McDermott a less attractive acquisition target.
"If you are looking to acquire the oil and gas business, it makes it harder to buy because of the other business," he said. "The U.S. government won't let you have it."
He said McDermott's U.S. government contracts include supplying fuel for the nuclear-powered submarine fleet.
McDermott shares rose $2.38, or 11.5 percent, to $23.04 on the NYSE early Monday afternoon.
(Reporting by Steve James, editing by Dave Zimmerman; Editing by John Wallace and Richard Chang)
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