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Does the Market Likes McDermott International Better Flying Solo?

By Motley Fool Staff – Updated Apr 26, 2018 at 7:00PM

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Shares of the offshore oil services specialist spiked after the board rejected a takeover bid.

In this segment from the MarketFoolery podcast, host Chris Hill is joined once again by Million Dollar Portfolio's Jason Moser, and Stock Advisor Canada's Taylor Muckerman to talk about the latest news around McDermott International (MDR), which spurned a buyout offer from fellow oil and gas engineering firm Subsea 7.

The target has its eyes on a purchase of its own: Chicago Bridge and Iron (CBI), which is a less obvious business fit. But despite the rejection of Subsea 7, which of these deals might end up closing is still very much up in the air.

A full transcript follows the video.

This video was recorded on April 23, 2018.

Chris Hill: Let's move on to McDermott International, which is an oil-field services company, and the stock is up about 15% this morning after McDermott rejected a takeover bid. I take it, Taylor, you agree this was the right move for them.

Taylor Muckerman: It's kind of interesting when you look at what's going on with McDermott International, because last December, they made a bid to acquire Chicago Bridge & Iron, which is in the energy industry but it's a completely different business lineup than what you see at McDermott. McDermott focuses more on the offshore space -- entirely, in fact. Chicago Bridge & Iron deals with more of the power plant infrastructure in the United States. So, I don't see much overlap there.

It's kind of interesting. The big sell there for investors was that McDermott's CEO came into McDermott, turned that company around. He thinks he can do the same thing for underwater projects at Chicago Bridge & Iron. So, as a shareholder, you're wondering, "Well, do I really want to take on a potential flop in Chicago Bridge & Iron? Or do I want to be acquired at a 16% premium by a company that's in the same business that we are," which is Subsea 7, offshore business? If they did join forces, they would have a much broader geographic portfolio. So, you look at, 90% of McDermott's revenue, coming from the Middle East and Asia. 85% of Subsea's revenue, coming from the North Sea, Africa and the Americas. So, I see a much more simplistic tie up between those two companies than I do with Chicago Bridge & Iron.

It's yet to be seen if Subsea 7 is going to bump up the bid price. But, they only have until May 2nd to do so, because that's when the vote for McDermott's acquisition of Chicago Bridge & Iron takes place. So, for me personally, when you look at this, the Subsea deal needs an industry turnaround, because offshore oil and gas has really been on the back burner as oil has turned around, because it's much more expensive to produce offshore oil. With the Chicago Bridge & Iron deal, you need an industry turnaround and a company turnaround, so, much more complicated there, in my mind.

Hill: So, Chicago Bridge & Iron is not actually in the business of building bridges with iron?

Muckerman: [laughs] No. Maybe they were at one point, but no longer.

Chris Hill has no position in any of the stocks mentioned. Taylor Muckerman has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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Stocks Mentioned

McDermott International, Inc. Stock Quote
McDermott International, Inc.
Chicago Bridge & Iron Company N.V. Stock Quote
Chicago Bridge & Iron Company N.V.

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