KBR Inc: Irenic Capital Pushes for Separation of Sustainable Technology Solutions Segment
KBR Inc, a science, technology, and engineering solutions company, is facing pressure from activist investor Irenic Capital Management to separate its Sustainable Technology Solutions (STS) segment from its Government Solutions (GS) segment. Irenic, which has accumulated a position of over 1% in the company, is urging management to spin off the STS segment, citing fundamental differences between the two businesses.
The STS segment, which focuses on energy and sustainability-focused technology, has grown revenue by an average of 16.7% annually since FY21 and has margins of approximately 20%. In contrast, the GS segment, which provides government contracting services, has experienced revenue contraction since FY21 and has adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) margins of about 10%.
Irenic believes that separating the two segments would create value for shareholders by allowing each business to attract the appropriate shareholder base and management focus. The company currently trades around 11.5 times enterprise value to the last 12 months’ adjusted EBITDA, which is below the average multiple of 14-15 times EBITDA for peer companies in the STS segment.
Separating the two segments could also result in cost savings, with Irenic estimating that the company could reduce corporate overhead costs by $50 million, which would go directly to the bottom line. Additionally, the company could use the proceeds from the spin-off to buy back shares, creating additional value for shareholders.
Irenic is not the only shareholder who supports a separation, with many other investors sharing this view. The company’s board of directors has an empty seat, which could be filled by an independent director with relevant industry experience, potentially paving the way for a strategic review of the company’s businesses.
Elliott Investment Management, another activist investor, has recently advocated for the separation of Honeywell International Inc into two companies, and Honeywell subsequently announced a strategic review of its businesses. Irenic’s co-founder, Adam Katz, was a former employee of Elliott Investment Management, and it is possible that the two firms could collaborate on a potential acquisition of parts or the entirety of KBR.
Overall, Irenic’s push for a separation of KBR’s STS segment could create significant value for shareholders and provide a new direction for the company’s future growth.