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Undervalued Government Segment is Prime for an Activist-Led Spinoff

Following Fluor Corp.'s (FLR) strategic review which completed on September 24, the management highlighted plans to several business segments on the block to refocus on engineering, construction, and maintenance services. However, in the process, they've undervalued the Government segment in their targeted sale price, and we believe there's further value to be had in performing a Spinoff instead. With the right activist-led push, that Spinoff (and resulting upside) can be made a reality.

What's Happening?
Following the strategic review’s completion on September 24, 2019, Fluor Corp. (FLR) announced the decision to put select businesses on the block with intent to instantaneously mend the financial stability of the company and let its remaining segments refocus on engineering, construction and maintenance services in core markets. As per recommendations, they plan to dispose of AMECO, the construction equipment rental company, and the Government business. The management also intend to do away with surplus real estate and non-core investments. FLR expects to gain around $1bn in total proceeds through these divestitures. In a bid to further conserve their cash position, FLR announced a roughly 50% reduction to the quarterly dividend to $0.10 per share beginning with the next quarterly dividend declaration. Further points investigated in this analysis include:

Undervaluing the Government segment at the proposed sale price;
Strategic restructuring will strengthen FLR's cash position;
Private Equity Bernhard Capital may look for other investors to unlock greater value;
All bad news now seems to be priced in;
Upside in a potential break-up on an SOTP basis;

The Edge View...
If the execution model highlighted in the strategic review is perfectly adapted, it will be the sole move to help the ship sail through rough waters. Asset sales provide the much-needed liquidity cushion required to complete ongoing projects without further leveraging the balance sheet. Additionally, the sale of the Government segment makes FLR a pure-play Engineering, Procurement & Construction (EPC) company with core expertise and more than 100 years in the field. However, we believe the management is undervaluing the Government segment’s intrinsic value in the current attempt at a sale.

By our estimate, the segment on its own is worth more than $1.24bn, which, along with the sale of AMECO, may gain more than what FLR set as an expectation ($1bn). Furthermore, we see potential for considerable upside if FLR were to Spinoff any or some of its segments, which we believe are more valuable individually instead of combined. If an investor gets on the board of the company, they can guide the company toward larger value unlocking from what the management currently anticipates.