Irenić takes position at KBR. How can an activist improve shareholder value?

a job: KBR It provides scientific, technological and engineering solutions to governments and companies around the world. The company operates through two segments: Government Solutions and Sustainable Technology Solutions. Its Government Solutions (GS) business segment provides full lifecycle support solutions for defence, intelligence, space, aviation and other programs and missions to military and other government agencies in the United States, the United Kingdom and Australia. Its Sustainable Technology Solutions (STS) business segment is focused on process technology covering ammonia/syngas/fertilizers, chemicals/petrochemicals, clean refining, and circular processes/circular economy solutions.

Stock market value: $7.91 billion ($59.36 per share)

In recent weeks, government contractors, including KBR, have seen sector-wide credit ratings downgraded in response to perceived risks associated with the incoming Trump administration. Investors are speculating that the new Department of Government Efficiency (DOGE), with its mandate of cutting federal spending, has already pledged to cut federal spending. Trimming $2 trillion from the federal budget, could lead to a material decline in the profitability of government contractors. As a result, between Election Day and the report that Irenec had built a position in the company, KBR shares fell more than 18%. However, KBR may have been unduly punished by DOGE speculation. In fact, KBR appears to be more insulated from these threats than the market currently perceives. First, while the company's general services business represents 75% of KBR's revenue, it contributed less than half of its operating income in FY23. In addition, 25% of GS's business is international, particularly in the UK, and is protected from Potential effects of DOGE. Given the remaining 75% of this segment in the US market, careful analysis reveals that only relatively small portions of KBR's services are expected to experience any relevant discretionary cost pressures. While much is currently uncertain, at this moment the threats to the public services sector appear to be exaggerated. Moreover, the STS sector may be the beneficiary of the upcoming administration's plans. Under the Biden administration, there has been a moratorium on export permits for LNG plants and several projects have been put on hold. The Trump administration plans to reverse this, which could serve as a tailwind for KBR as the company is well positioned to win new and existing projects.

Irinek may now have entered the picture, perhaps attracted by KBR's downgraded valuation in the wake of the recent external shock to stock prices. Irenic has a more than 1% position in the company and is urging management to spin off its STS segment. These are fundamentally different companies with distinct support needs, management requirements and end markets. Companies that do not belong together should be separated for several reasons: (1) each can attract the appropriate shareholder base and obtain the appropriate multiple; (2) each can customize management focus and compensation to be more closely aligned with specific business needs; (3) Separation can reduce a company's overhead costs, producing leaner, more efficient entities. KBR currently trades at about 11.5 times enterprise value compared to trailing 12-month adjusted EBITDA. Looking at peer companies, GS companies typically trade in this range, but those more like STS fetch an average multiple of 14 to 15 times EBITDA. Separating the two should result in a re-evaluation of the STS business creating value for shareholders before any cost savings are realized as a result of the separation. By separating the two companies, many of the corporate costs that the company currently incurs would not be needed, potentially saving $50 million that would go directly to the bottom line. Finally, before any value creation, the company can buy back shares to create additional value for shareholders. While each value creation tool may not be incredibly compelling, combining them can lead to a 50% increase in shareholder value.

Ireneke isn't the only shareholder who thinks the breakup makes sense; Many other contributors share this view. In other words: keeping the two companies together makes no sense. A few years ago, it would have been fair to say that separating the STS was not possible due to the size and youth of the unit. In 2021, the sector generated an operating loss of $30 million, and in the following years, management has successfully made that argument, saying the sector needs to be bigger to be unbundled. But STS now generates nearly $400 million in EBITDA, and it's time for management to move on. Ireneke loves working behind the scenes with management and using the power of persuasion to win the day. We expect the company to do so here until KBR's announcement of the strategic review or the company's nomination deadline of February 14, 2025, whichever comes first. If a satisfactory announcement is not made by February 14, we expect Ireneć to do something she has never had to do before: launch a proxy fight. However, due to shareholder support for the spin-off and the fact that there was an empty seat on the Board of Directors (General Lester L. Lyles) Recently announced He will retire from the Board of Directors effective at the 2025 Annual Meeting) and we do not expect it to come to that. If Irenec is given a seat on the board, it will most likely be for an independent director with relevant industry experience rather than a director of Irenec.

If KBR undertakes a strategic review, we would be remiss if we did not mention a similar and closely related position. Elliott Investment Management He was called recently To separate Honeywell into two companies, Honeywell later announced Strategic review Of her works. Honeywell could be a potential strategic acquirer of parts or all of KBR. Irenic's co-founder, Adam Katz, was a former employee at Elliott Investment Management, and I'm sure he still knows people there.

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