KBR Prepared to Sever Last Ties To Halliburton With Stock Swap
Thursday, March 29, 2007
Rising 11 stories in Crystal City is a building with three big red letters on the outside: KBR.
The company, among the largest private contractors in Iraq, has long been associated with its giant parent, Halliburton, and both have been lightning rods for controversy. Now they are preparing to split, and Halliburton has set a deadline of midnight tonight for a stock swap to help accomplish that.
On its own, KBR would have an opportunity to chart a course as a wide-ranging government contractor with diverse skills. Halliburton would be free to concentrate on its core oil- and gas-services business.
The split offers a chance for the two companies to put some distance between them and their past. Halliburton has been criticized for its close ties to Vice President Cheney, who was its chief executive from 1995 to 2000. This month, Halliburton said it would open a corporate office in Dubai and move its chief executive there.
KBR, meanwhile, has defended itself against accusations that it overcharged the government and did not properly document work done under its contracts in Iraq.
"For better or for worse, the public is fixated on the KBR-Halliburton-Cheney conspiracy," said Steven L. Schooner, a procurement specialist at George Washington University Law School.
The separation is a crucial turning point for two companies started in 1919 by oilmen in Texas and Oklahoma. By the time Halliburton bought what was then Brown & Root in 1962, both businesses had worldwide reputations. Brown & Root built the first offshore oil platform in 1947; Halliburton had 22 offices around the world. The M.W. Kellogg division of Dresser Industries, which Halliburton bought in 1998, was added to the subsidiary, which was renamed KBR in 2002. Halliburton is widely described as pleased to be rid of a relatively low-margin business that was viewed as a drag on its stock price.
"They're just different businesses and over time it's been a distraction for management and a distraction for investors," said Michael Urban, a senior analyst at Deutsche Bank. "As they separate they'll both go on their merry way."
KBR is being spun off in two stages. The first was in November, when Halliburton launched a public offering for a 19 percent stake in the subsidiary.
The second is taking place now. Halliburton is shedding the rest of its stake in the company and shareholders have the right to trade their shares for shares in KBR. The deadline for that swap is midnight tonight, but it may be delayed to give investors more time to decide what to do with their shares.
KBR's share price has fallen 17 percent since Halliburton announced in February that it would sell its remaining stake.
Analysts attribute part of the decline to Wall Street gamesmanship. They say some investors have traded Halliburton shares for more valuable KBR stock, and then sold the new shares quickly, pocketing the profit and driving down KBR share prices. That trading has led others to bet that KBR shares will continue to fall, putting further pressure on the stock. As KBR share prices fall relative to Halliburton's it becomes less attractive for Halliburton shareholders to trade in their stock for shares in the new company.
Trading issues are not the only explanation for the decline. Analysts said some investors may also be responding to KBR's decision to record charges to account for problems with some overseas projects, including one in Escravos, Nigeria, where civil unrest has delayed work.
The disentangled KBR will have other business challenges ahead, analysts said. The company built up a huge revenue stream by feeding, housing and providing other services to U.S. troops in Iraq and elsewhere. Roughly half its $9.6 billion in revenue last year came from its work in Iraq.
But the Army intends to spread out more of the work among three contractors to be chosen later this year. And there is the longer-term expectation of withdrawing troops, and the infrastructure that supports them, from Iraq.
Though KBR is expected to begin its new life virtually debt-free, the company no longer will have Halliburton's deep financial pockets. Already, there is talk that KBR will sell its interest in running the Devonport Royal Dockyard once it no longer has Halliburton's backing, analysts said.
On the positive side, KBR could emerge as less bureaucratic and more focused on its core strength: engineering and construction in the energy industry.
Raymond F. DuBois, a senior adviser at the Center for Strategic and International Studies and a former acting Army undersecretary, said a stand-alone company might be more willing to address concerns from Congress and take a more open tone with critics.
"It won't be laboring under the Halliburton approach to life," said DuBois, who was a consultant to KBR for the past year. "You're now independent. You no longer have to look to Houston. They had to get permission from mother Halliburton on how to deal with Congress and the media."
KBR officials declined to speak specifically about their relationship with Halliburton or their plans, citing the spinoff quiet period.
KBR starts life as an independent company with one ace: its specialty of turning natural gas into liquid that's shipped around the world. Analysts say there is a backlog for infrastructure of such facilities. And there are opportunities for KBR to increase its revenues in its energy and chemical business, which is now 25 percent of its revenues.
"KBR has a fine reputation in its engineering and energy expertise," said Barry Bannister, an analyst from Stifel Nicolaus. "Where they were weak is that they weren't attentive enough in pricing their contracts. They took a lot of risk and sometimes shareholders would pay for that."
Analysts said they don't expect the upper management of KBR to change. William P. Utt, who was named KBR's president and chief executive in March 2006 and previously worked at Suez Energy North America; and Cedric W. Burgher, who came to the company as chief financial officer in 2005 from a similar job at Burger King, are regarded by analysts as executives who can push the company forward.
"The separation leads to a more acute focus to KBR," said William Herbert, co-head of research at Simmons & Co. International. "They were already a formidable entity in its own right. And now probably more so."