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finance & business
Halliburton Starts Shedding KBR Unit
Parent firm could complete spinoff of engineering and contracting subsidiary by April
By Mary Buckner Powers
Tom Sawyer/ENR
Firmís work managing Iraq logistics earned it revenue, but also lots of negative press.

Kellogg Brown & Root, the engineering and construction subsidiary of Halliburton Co., Houston, raised $508 million in an initial public offering on the sale of more than 32 million shares of common stock, the company said after the offering closed Nov. 21. The parent firm may complete the spinoff by April.

The sale included 4.1 million shares to the underwriters, Credit Suisse Securities; Goldman, Sachs & Co.; and UBS Securities, which exercised their full over-allotment option. The company originally expected to net approximately $441 million from the sale, which will be used to repay debts owed Halliburton subsidiaries. Any remaining proceeds will be used for KBR’s general business.

The IPO was held Nov. 16 with shares offered at $17, the high end of Halliburton’s expected $15 to $17 range. Shares jumped to $21 once they began trading on the New York Stock Exchange under the symbol KBR and closed at $20.75 on their first day of trading. Shares had traded as high as $22.82 in the first three days on the market, closing Nov. 21 at $21.81.

Halliburton now owns 81% of KBR, but intends to complete the spinoff of the company by April, says an analyst speaking on background. The parent firm intends to dispose of the remainder of the subsidiary’s common stock as quickly as possible through a tax-free distribution to its stockholders, says Cathy Mann, a Halliburton spokeswoman.

If Halliburton does not proceed with the distribution, it could elect to dispose of the stock in other ways, including an additional public offering, open market sales or sales to one or more third parties, Mann says. The parent could elect to offer stockholders the option to exchange their shares for shares of KBR stock, she adds. “Halliburton is not subject to any contractual obligation to maintain its share ownership,” Mann says.

The question of whether an oil services firm should own an engineering and construction company has always been a topic of conversation, according to an analyst who did not want to be identified. “Finally, Halliburton management decided shareholders would be better off if the company were a pure oil services company,” he says.

Tom Sawyer/ENR
KBR provided temporary housing for troops in the war zone.

Halliburton stock has always sold at a discount, with management always blaming that on KBR, says the analyst. “Since the valuation of publicly traded engineering and construction companies has been pretty good, the time was right to spin off KBR,” he says. “It’s as simple as that. It has nothing to do with the Iraqi jobs being a political football. It’s just a way to maximize shareholder value.” KBR has had a controversial stint as the military’s main logistics contractor during the Iraq war. It is the largest contractor in Iraq, posting $3.6 million in revenue for the first nine months of this year and $5.4 billion in revenue there in 2005.

Halliburton on Nov. 1 launched its plan to spin off KBR, two years after first announcing its intent to shed the unit by either selling it or spinning it off. The parent announced that strategy in September 2004 when it made public its plan to restructure in hopes of saving up to $100 million in annual operating costs.

KBR filed for bankruptcy as part of Halliburton’s effort to resolve its asbestos liability, which it inherited when it purchased Dresser Industries in 1998 for $8 billion. KBR emerged from bankruptcy in December 2004, at the same time the $4.2 billion asbestos pact became final. 

Halliburton delayed the IPO by a day after the British Ministry of Defense asked it to withdraw the deal to give the agency time to evaluate KBR as a stand-alone firm. Executives met with British officials and agreed to supply financial documents needed to perform a risk assessment. KBR owns 51% of Devonport Management, which owns and operates Devonport Royal Dockyards.


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