Brookfield Business Partners LP (BBU.N)
INCREASE TARGET PRICE
Acquisition of Westinghouse Electric; Expanding Infrastructure Services Exposure
Overview: Yesterday, Brookfield Business Partners (BBU) along with institutional partners announced it will acquire 100% of Westinghouse Electric Company (WEC) from Toshiba Corp for total consideration of US$4.6bn. WEC is a leading supplier of infrastructure services to nuclear power plants, servicing over 50% of plants worldwide.
View: We believe this transaction is positive from both a strategic and financial perspective: (1) BBU is opportunistically acquiring an industry- leading, non-cyclical business in the midst of a repositioning following challenges in its nuclear power plant construction business; (2) There is the potential to leverage Brookfield’s broader infrastructure expertise to drive growth and improve efficiencies; (3) The core operations are profitable, generate recurring cash flows and potential cost reductions could add US$205m of EBITDA over the next several years. Furthermore, a combination of reactors coming back online and an increase in decommissioning could drive incremental revenue.
Transaction Highlights: Total consideration of US$4.6bn (US$1bn equity, US$3bn debt, US$600m operating liabilities) implies a 7.6x EV/EBITDA multiple incorporating cost savings (11.4x on trailing EBITDA). BBU will commit 50% of the equity and may syndicate a portion to institutional partners, though we believe the Company will retain an ownership stake above its typical 25%.
Valuation - TP to US$42: We value WEC at 9x EV/EBITDA (+US$3 to our TP) and are increasing our 2018 EPS by 11% (to $3.15) to reflect the deal. Additionally, we are raising our valuation for GrafTech by US$5 as we have increased conviction that above-trend graphite electrode prices (US$7,500/mt for Q1/18) are sustainable beyond the next few quarters. We estimate BBU has US$500-650m of capital available post-WEC which we do not incorporate in our NAV (+US$1-3). A key risk to our thesis is executing on the turnaround of "out-of-favour" businesses to achieve targeted returns (15-20%).