Description

The Washington Group, formerly known as Morrison Knudsen, is emerging from chapter 11 for the second time in the past decade. The cause of the most recent filing was the purchase of the Raytheon construction business in July 2000 which resulted in the assumption of liabilities that were approximately $700MM greater than the initially estimated $450MM. WGIIV filed a suit against Raytheon seeking reimbursement for excess liabilities. Ultimately they were unable to continue funding the cost overruns on several of the Raytheon projects and filed chapter 11.
Raytheon and WGIIV negotiated a settlement that resulted in Raytheon taking responsibility to complete several projects and assume certain claims related thereto and waiving substantially all counter claims.
A plan of reorganization, which was approved November 20, 2001, resulted in a debt for equity swap where the bank debt received 80% of the new equity, and the unsecured creditors got 20%. There are warrants and options for the unsecured creditors and management as well. There are 25 million new shares and warrants/options as follows: 2.8M at $24.00, 3.1M at $29.00, 4.4M at $33.00 and 3.8M at $35.50. There is a new $350MM debt facility that will have about $60MM drawn on average for the first year and there will be $70MM in cash, so the balance sheet is very good shape this time around.
Projected revenue and EBITDA is $2.7-3.0B, $100-120MM 2002, $2.8-3.1B, $130-140M 2003, and $3.0-3.3B, $145-155M for 2003. Depending upon how you treat the warrants the valuation on an ev/ebitda bases is extremely low. Using midpoints the shares are trading at 3.9 times 2002 and 3.3 times 2003. The comparable public companies trade at 5.0 to 6.5 times ebitda with balance sheets that have a fair amount of leverage. Earnings quality and free cash flow is always a controversy with construction companies given the opportunity to use percentage completion accounting. Coming out of the bankruptcy process management has little incentive to overstate ebitda and in fact could be conservative in its guidance. Management warrants and options are struck at a significant premium to the current share price.
The business is fairly diversified into four segments: 1) Power, 2) Infrastructure and Mining, 3)Industrial/Process, and 4)Government. The current economic environment has led to a reduction in both the industrial and power segment plan estimates.
My price objective is based upon a 6 multiple of 2003 ebitda or $29.00 per share fully diluted.

Catalyst

I see three primary catalysts: 1) WGIIV is just very cheap! A company of this size with a debt free balance sheet is almost never found trading with a sub 4.0 ebitda multiple (history not withstanding), 2) it is hard to land significant new "mega" projects while in chapter 11 and there should be ample opportunity to leverage WGIIV's relationships to win new business post reorganization and recover to historic ebitda levels, and 3) the company has been totally off the radar screen from Wall Street and the buy side since the filing - moving from when issued trading and getting exposure should drive the shares to a more appropriate valuation.