* To spin off its B&W business
* Shares jump 11 percent
(Adds analyst comments, byline)
By Steve James
NEW YORK, Dec 7 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
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
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)