McDermott CEO Bets on Next Turnaround at Ailing Chicago Bridge
(Bloomberg) -- David Dickson, chief executive officer of McDermott International Inc., has already turned around one troubled construction company. Now he’s trying to persuade investors he can do it again.
The target this time is Chicago Bridge & Iron Co., a builder of petrochemical facilities and power plants that has debt of $2.1 billion -- more than its market value -- and four projects dragging down profit. McDermott agreed in December to acquire the company in an all-stock deal valued at $6 billion including debt.
The deal prompted McDermott’s biggest stock swoon in two years. This month, however, shares are ticking back up as Dickson vows to do at Chicago Bridge what he did at McDermott, a builder of offshore platforms. Of nine projects that were losing money when Dickson took the reins in late 2013, eight are now profitable. Operating income jumped to almost $300 million last year from less than $20 million in 2014.
“It has all the hallmarks of the McDermott of three or four years ago,” Dickson, a 49-year-old Scotland native, said in a telephone interview. “Everything is fixable.”
The shares have mostly recovered from a 12 percent stock drop on Dec. 19, the first day after the deal was announced. Chicago Bridge, which also sank after the deal was announced, has erased its losses.
In addition to extending McDermott’s reach into petrochemical projects, the combination also adds technological capabilities and a bigger U.S. footprint. The Middle East accounts for two-thirds of McDermott’s sales. Only 2 percent comes from the U.S., a market that accounts for 80 percent of revenue at Chicago Bridge. Both companies are run out of the Houston area.
The combined companies will make joint bids and probably increase a savings target of $250 million over two years, Dickson said. He described the corporate fiefdoms, poor financial estimating, weak governance and need to renegotiate contracts at Chicago Bridge as similar to what he encountered at McDermott in December 2013.
When Dickson arrived at McDermott, he refinanced debt to give the company financial breathing room and changed three-quarters of the leadership in an effort to tear down internal barriers between different parts of the organization.
As U.S. crude prices plunged to less than $30 a barrel in 2016 from more than $100 in 2014, Dickson wooed state-run oil companies because their budgets are more stable. He spent 70 percent of his time on the road, traveling to countries such as Saudi Arabia, India and Mexico, repairing and building relationships.
“David is absolutely the right guy to do this. He’s proven himself,” said Marie Lorden, co-founder of Fairpointe Capital in Chicago, which owns shares in both McDermott and Chicago Bridge. “He understood the culture and what had to change and was able to make the hard decisions.”
The combination still heaps new risk on McDermott, which had been poised to reap the benefits of renewed spending on offshore drilling projects as oil prices rise. The company’s shareholders will own 53 percent of the combined entity, with Chicago Bridge investors holding the rest.
Power-plant construction is facing headwinds in the U.S. as renewable energy projects and slack demand throw the economics of new generators into question. A worldwide glut of liquefied natural gas, meanwhile, is weighing on the kind of export projects that Chicago Bridge has been contracted to build.
Chicago Bridge’s four troubled projects -- two liquid natural-gas processors and two gas-fired power plants -- resulted in second-quarter charges of $548 million. On top of its debt, the company has $920 million of net liabilities tied to projects. And uncertainties still loom, said Andrew Wittmann, an analyst with Robert W. Baird & Co.
“They think they fixed it, but you never really know on these projects that are so big,” Wittmann said. “So investors are going to be a little skeptical on that.”
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