McDermott to Spin-Off Nuclear Unit - Analyst Blog

Energy-focused engineering and construction firm, McDermott International Inc. (MDR) announced plans to separate its power generation business from its offshore oil and gas services business, thereby creating two independent, publicly traded companies. McDermott will spin-off The Babcock & Wilcox Company (B&W), which specializes in construction, environmental controls and boilers for the power plant industry, within the next three–four quarters. Babcock & Wilcox also manufactures nuclear components. 

The remaining business will take on the name of McDermott's J. Ray McDermott S.A. (JRMSA) operating subsidiary and will trade under McDermott International's existing ticker symbol, MDR. J. Ray McDermott will stand alone as an engineering, construction and installation company, focused in the offshore oil and gas exploration and production market. 

The spin-off is proposed to be tax-free to shareholders of McDermott. Post separation, current stockholders of McDermott will get one share of each company. J. Ray McDermott, will remain in Houston, while Babcock & Wilcox’s corporate headquarters is likely to be shifted to Charlotte, North Carolina; from Lynchburg, Virginia.
 
McDermott’s move to split itself in two is seen as a response to new government regulation affecting the power unit. As per recent modifications in federal regulations regarding companies incorporated overseas and have U.S. subsidiaries, McDermott, incorporated in Panama, might not be able to enter into new defense and nuclear contracts with the U.S. government, which is Babcock & Wilcox's largest client. A stand-alone Babcock & Wilcox would not come under that restriction as it is incorporated in Delaware. This will limit the risk of missing out on lucrative U.S. government contracts. 

We remain positive on the outlook for new McDermott post-split, as it holds the promise of unlocking significant value. Creation of two pure-play companies will allow both of them to pursue great opportunities in their markets without the constraints of the parent company. Incidentally, McDermott had already been operating the two units independently under the B&W and J. Ray franchises, including separate external credit facilities. 

Incorporated in 1959, Houston, Texas-based McDermott International Inc. (MDR) is an energy-focused leading global engineering and construction company with specialty manufacturing and service capabilities. The firm provides a diverse range of products and services to customers in the energy and power industries, including utilities and other power generators, major and national oil companies, and the U.S. Government.
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