A favorable Delaware Supreme Court ruling in favor of the firm lifted its stock yesterday, but shares remain undervalued.
Today's Delaware Supreme Court ruling in favor of 5-star Chicago Bridge & Iron
may signal its long-running dispute with Westinghouse is near an end. We believe the uncertainty surrounding this issue was one of the major issues depressing the firm's stock price. CBI stock was trading roughly 35% higher intraday.
David Silver, CFA, CPA, is a senior equity analyst for Morningstar.
We plan no change to our $37 fair value estimate as a result of today's ruling as our fair value estimate already assumed the value of post-closing adjustments or a future settlement would be immaterial.
In our view, today's reversal of a lower-court ruling means any potential adjustments or claims related to CB&I's October 2015 sale of its nuclear construction business to Westinghouse will be evaluated under contract law. The lower court previously ruled that the dispute was to be resolved via an arbitration process specified in the original agreement. The original arbitrator came from a financial background, and was empowered with great flexibility regarding his approach to evaluating completing claims, and with no requirement to utilize a legal framework for his ultimate, binding decision. We believe this structure for dispute resolution created additional uncertainty for investors and led many to believe CB&I could ultimately be required to pay some or all of Westinghouse's claims.
The nominal amounts in dispute are large: Westinghouse sought post-closing adjustments totaling $2.15 billion from CB&I, while CB&I sought $428 million from Westinghouse.
In our view, the sale agreement is a binding contract between two sophisticated parties with no evidence of fraud or misrepresentation. If so, then any dispute to the original agreement will be evaluated under straightforward principles of contract law applied to a binding sales contract. If we are correct, we believe CB&I's defenses against Westinghouse's claims for additional compensation appear very strong, while Westinghouse's avenues to pursue additional compensation are quite limited.
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