KBR, based in Houston, Texas, is renowned for delivering scientific, technological, and engineering solutions worldwide. The company operates in two distinct segments: Government Solutions (GS) and Sustainable Technology Solutions (STS). The GS segment is focused on offering comprehensive life-cycle support for defense, intelligence, space, and other critical government operations across the U.S., U.K., and Australia. Meanwhile, the STS segment specializes in technology-driven solutions, tackling areas such as ammonia, syngas, fertilizers, petrochemicals, and circular economy processes.
Valuation-wise, KBR stands at $7.91 billion, with shares priced at $59.36 each.
The venture capital firm, Irenic Capital Management, led by Adam Katz and Andy Dodge, is taking a keen interest in KBR. Despite owning less than 1% of KBR, Irenic is strategically pushing for changes within the company. Founded in 2021 by veterans of Elliott Investment Management and Indaba Capital Management, Irenic is known for its collaborative yet strategic approach, suggesting spinoffs and business sales to optimize operations.
In their latest move on December 19, 2024, Irenic aims to persuade KBR to separate its STS segment from GS. The rationale stems from substantial growth disparities between the two: while GS has been facing shrinking revenues and has remained a low-margin business, the STS segment has been on an upward trajectory, boasting annual revenue growth of 16.7% and enjoying higher margins.
Recent developments in the political climate have not been kind to government contractors like KBR. Speculative concerns around the new Department of Government Efficiency (DOGE) potentially cutting federal contracts by $2 trillion have furnished headwinds, contributing to an 18% drop in KBR’s share value post-Election Day. However, KBR’s exposure to said risks may be overstated. With a significant portion of its GS revenue international, particularly in the U.K., and existing services only minimally affected by anticipated cost pressures, the company seems to be in a better position than perceived. Moreover, the incoming U.S. administration’s plans to relax previous restrictions on LNG exports might benefit KBR’s STS segment, potentially opening new project avenues.
Irenic’s entry into the scene likely considers KBR’s recent stock dip an opportunity. Their proposal to separate the two segments of KBR centers on creating distinct, value-maximizing entities. Such a split would better align the businesses’ operational focus, attract suitable investors, reduce corporate overhead by $50 million, and reflect more accurately the valuation multiples of the STS segment compared to industry averages. Separately, acquiring shares post-split could bolster shareholder value by a significant margin—up to 50%.
This potential restructuring has fans among KBR’s shareholders as well. They argue, given STS’s now robust $400 million EBITDA, that the business is ripe for independence—marking a new chapter since arguments against spinoff feasibility due to size no longer hold.
Whether Irenic will need to escalate its approach to gain this split remains to be seen. Tactful discussions with KBR’s management are underway, with a crucial company nomination deadline looming on February 14, 2025. Should strategic paths remain at a stalemate, Irenic might have to resort to launching a proxy contest, a scenario it’s yet to experience.
The possibility of KBR initiating a strategic review parallels previous occurrences in the corporate world. A recent example is Elliott Investment Management’s advocacy for Honeywell’s division, showcasing the potential paths for acquiring parts or whole KBR assets. Connections between Katz and his former associates at Elliott could play to Irenic’s advantage here.
Ken Squire, a notable figure in the investor activism arena, presides over 13D Monitor and manages the 13D Activist Fund, which actively invests in these types of corporate dynamics. His insights highlight the broader significance of such shareholder activism in shaping company strategies and value propositions.
