Company: Fluor Corp (FLR)
Business: fluorine is a holding company providing engineering, procurement, construction, manufacturing and modularization and project management services. The Company's segments include Energy Solutions, Urban Solutions and Mission Solutions. The Energy Solutions segment provides EPC services to traditional oil and gas markets, including production and fuel, chemical, LNG and power markets. The segment serves these industries with comprehensive project lifecycle services. The Urban Solutions segment provides EPC and project management services to the advanced technology and manufacturing, life sciences, mining and metals, infrastructure and professional staffing industries. The Mission Solutions segment provides high-quality technical solutions to the United States and other governments. These include, among others, the Department of Energy, the Department of Defense, the Federal Emergency Management Agency and intelligence agencies. The segment also provides services to commercial nuclear customers.
Market value: $7.89 billion ($48.79 per share)
Activist: Starboard value
Property: Starboard value
Average cost: n/a
Comment from activists: Starboard is a highly successful activist investor and has extensive experience helping companies focus on operational efficiency and margin improvement. They are known for their excellent diligence and for running many of the most successful campaigns. Starboard has initiated activist campaigns at 18 former industrial companies and their average return in these situations is 50.55% versus an average of 11.73% for the Russell 2000 over the same periods. Starboard has run a total of 162 activist campaigns in its history and achieved an average return of 21.13% compared to 14.24% for the Russell 2000 over the same period.
What happens
On October 21, Starboard announced a nearly 5 percent stake in Fluor and announced its intention to capture value from the company's approximately 39 percent stake in Fluor NuScale performancewhich represents more than 60% of the company's market capitalization, including through a possible separation.
Behind the scenes
Fluor provides integrated engineering, procurement, construction and project management services to a variety of end markets. Historically, the EPCM market has been a highly competitive environment that encouraged high risk-taking and where growth often took precedence over discipline and profitability. For Fluor and much of the industry, this resulted in management aggressively increasing the backlog of higher-risk blanket contracts and guaranteed minimum contracts, resulting in execution risks, low margins and cost overruns. Ultimately, this industry-wide shift led many companies to scale back their construction efforts or even file for bankruptcy, and Fluor was no exception, with the company's stock price falling below $4 in March 2020.
However, this began to change when the company appointed David Constable as CEO in early 2021. Under his leadership, Fluor immediately focused on lower-risk, reimbursable projects, growing from 45% of the backlog to 80%, while reducing exposure to loss-making legacy projects from $1.8 billion to $558 million today, significantly reducing the risk profile.
Additionally, the company is largely associated with legacy energy projects and has tapped into faster-growing markets in its urban solutions segment, which now accounts for 73% of its backlog compared to 37% in fiscal 2021. As a result, despite these risk reduction efforts, Fluor was still able to maintain a stable backlog and achieve significant EBITDA growth, a compound annual growth rate of 14% from fiscal 2021 to fiscal 2024. Analysts forecast a compound annual growth rate of approximately 9% from fiscal 2024 to fiscal 2028.
With many of the major construction and EPCM providers exiting the market, Fluor's operational turnaround has emerged victorious on the other side of this turmoil and now operates with Bechtel in a duopoly of global end-to-end EPCM providers as the construction market has grown rapidly to now exceed $918 billion.
As a result of this successful operational overhaul, the market currently values ​​Fluor at 8.9x enterprise value versus calendar year 2027 estimates for consensus EBITDA, placing it between its EPCM (13x) and legacy construction peers (6x). So Fluor appears to be a great company with a great management team, operating in a duopoly in a growing industry that is fairly valued at an enterprise value of $6.7 billion. However, Fluor also owns a 39% stake in NuScale, a publicly traded small modular nuclear reactor company.
Fluor invested in NuScale more than a decade ago, and its early $30 million investment was instrumental in NuScale becoming the first U.S.-listed SMR company and the only company of its kind with a design approval from the U.S. Nuclear Reactor Commission.
As global electricity demand continues to rise, particularly along with the data center boom, nuclear power 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 was extremely lucrative – worth about $4.3 billion ($3.4 billion after taxes). That's more than half of Fluor's current enterprise value.
If the NuScale stake were removed from Fluor's valuation, Fluor's enterprise value would fall to $3.3 billion, which would represent an extremely small discount of just 4.6x, with competitors trading between 6x and 13x.
Starboard has built a nearly 5% stake in Fluor and is pushing management to unlock the value of its NuScale holdings. Starboard believes Fluor has multiple options to monetize its remaining NuScale stake. These options include simply selling their position through open market sales, an exchange offer, or a mandatory exchangeable note, with the proceeds potentially funding a large share repurchase, which would have a large impact on Fluor's earnings per share, particularly given its current low valuation.
Alternatively, Starboard has proposed a tax-free spin-off of Fluor's NuScale position, which could trigger a similar reassessment of the core business while allowing Fluor shareholders to maintain their commitment to NuScale's long-term potential.
Assuming Fluor maintains an EBITDA multiple of 8.9, which could be further improved given its discount to EPCM peers, the revaluation that could result from this separation could provide over 200% upside.
Starboard is a very experienced activist and also has a history in this industry. In June 2019, Starboard hired another contractor, AECOM. Over the course of the subsequent several-year collaboration, AECOM renewed its board, appointed a new CEO, exited the independent construction company and divested management services. This became one of Starboard's most lucrative projects in its history, with a return of 147% for the 13D infill versus 26% for the Russell 2000.
But more importantly, this was when they first met David Constable. Constable is chairman of Fluor and was its CEO until February. We therefore expect that the mutual respect between Starboard and Constable will promote a friendly, constructive relationship and be beneficial to shareholders.
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, a mutual fund that invests in a portfolio of activist assets.