Starboard aims to unlock the value of Fluor’s investment in nuclear tech company NuScale

Company: Fluor Corp (FLR)

Business: floor It is a holding company that provides engineering, procurement, construction, fabrication and modularization and project management services. The company’s divisions include Energy Solutions, Urban Solutions and Mission Solutions. The Energy Solutions segment provides EPC services for conventional oil and gas markets, including production and fuels, chemicals, LNG and power markets. The division provides comprehensive project life-cycle services to these industries. The Urban Solutions segment provides EPC and project management services to advanced technology and manufacturing, life sciences, mining and metals, infrastructure industries and professional staffing services. The Mission Solutions segment provides high-level technical solutions to the United States and other governments. These include the Department of Energy, Department of Defense, Federal Emergency Management Agency, and intelligence agencies. The division also provides services to commercial nuclear customers.

Stock market value: $7.89 billion ($48.79 per share)

Worker: Starboard value

Ownership: Starboard value

Average cost: n/a

Worker Commentary: Starboard is a very successful activist investor and has extensive experience helping companies focus on improving operational efficiency and margins. He is known for his excellent work and many successful campaigns. Starboard has launched activist campaigns in 18 former industrial companies and their average return on these scenarios is 50.55% versus an average of 11.73% for the Russell 2000 over the same period. Starboard has had a total of 162 prior activist campaigns in their history and has averaged a return of 21.13% versus 14.24% for the Russell 2000 over the same period.

what’s going on

On October 21, Starboard announced a nearly 5% position in Fluor and expressed its intention to unlock value from its ~39% holding in the company. NuScale PowerThat represents more than 60% of the company’s market capitalization, including potential divestitures.

behind the scenes

Fluor delivers integrated engineering, procurement, construction and project management services, spanning a wide variety of end markets. Historically, the EPCM market was a highly competitive landscape that required a high degree of risk-taking, where growth was prioritized over discipline and profitability. For Fluor, as well as much of the industry, this led management to aggressively increase their backlog of high-risk lump sum and guaranteed minimum contracts, leading to increased execution risk, lower margins and costs. Ultimately, this industry-wide shift caused many companies to curtail their construction efforts or even face bankruptcy, and Floor was no exception as the company’s share price fell below $4 in March 2020.

However, this began to change in early 2021 when the company appointed David Constable as CEO. Under his leadership, Floor immediately focused on low-risk payable projects, which grew from 45% to 80% of his backlog, while exposure to loss-making legacy projects went from $1.8 billion to $5 million at risk today.

Additionally, while largely dealing with legacy power projects, the company has entered fast-growing markets in its Urban Solutions segment, which now has a backlog of 73% compared to 37% in FY2021. As a result, even with these mock efforts, Fluor is still able to maintain a stable backlog and achieve annual EB1% annual growth rates of 4%. From FY2021 to FY2024, analysts are expecting ~9% CAGR from FY2024 to FY2028.

With many large construction and EPCM players exiting the market, Fluor’s operational turnaround has allowed the other side of the mess to emerge, now operating in a duopoly of global end-to-end EPCM players with Bechtel, while the construction market has grown rapidly, now worth more than $918 billion.

As a result of this successful operational overhaul, the market currently values ​​Floor at 8.9 times the calendar year 2027 enterprise value to consensus EBITDA between its EPCM (13x) and legacy construction peers (6x). So, Floor appears to be a great business with an excellent management team operating in a duopoly in a growing industry that is fairly valued with a $6.7 billion enterprise value. However, Fluor owns a 39% stake in NuScale, a small, publicly traded modular reactor company.

Fluor invested in NuScale a decade ago, and its $30 million initial investment was instrumental in NuScale becoming the first US-listed SMR company, and the only company of its kind with US Nuclear Reactor Commission design approval.

As global energy demand continues to grow, especially in tandem with the data center boom, nuclear generation will be critical, and SMRs will play an essential role in providing energy to meet this growth. As a result, Fluor’s investment in NuScale has been extremely lucrative – valued at approximately $4.3 billion ($3.4 billion post tax). That’s more than half of Fluor’s current enterprise value.

If you strip out the NuScale stake from Fluor’s valuation, Fluor’s enterprise value falls to $3.3 billion, which implies a very disappointing discount of just 4.6x, with peers trading at 6 to 13 times.

Starboard has acquired a nearly 5% position in Fluor and is urging management to unlock value from its NuScale holdings. Starboard believes Fluor has several avenues to monetize its remaining NuScale stake. These options include selling their positions through open market sales, exchange offers or mandatory exchangeable bonds, the proceeds of which could fund a large share buyback, which would be highly accretive to Floor’s EPS, especially at its current depressed valuation.

Alternatively, Starboard has proposed a tax-free spinoff of Fluor’s NuScale position, which could trigger a similar rerating of the parent business while providing Fluor shareholders with the option to retain their exposure to NuScale’s long-term potential.

Thus, assuming Fluor maintains an 8.9x EBITDA multiple, which can still be improved upon discounting EPCM peers, the rerating from this separation could increase by more than 200%.

Starboard is a very experienced operator and has a history in the industry. In June 2019, Starboard engaged another construction player, AECOM, where under the ensuing multi-year engagement, AECOM refreshed its board, appointed a new CEO, exited self-perform construction and shed management services. It became one of the most profitable jobs in Starboard’s history, returning 147% over the 13D filling, versus 26% for the Russell 2000.

But more importantly, he met David Constable for the first time. Constable is Fluor’s executive chairman and CEO until February. Therefore, we expect the mutual respect between Starboard and Constable to be conducive to a cordial, constructive relationship and beneficial to stakeholders.

Ken Squire is the founder and president of 13D Monitor, an institutional research service on shareholder activism, and the founder and portfolio manager of the 13D Activist Fund, which invests in a portfolio of mutual fund activist investments.