The Shaw Group

Demanding Fair Value &

a Proper Sale Process
October 17, 2012
Disclaimer
The analyses and conclusions of Denali Investors, LLC ("Denali Investors") regarding The Shaw Group,
Inc. and its affiliates (collectively, SHAW or the Company) are based on publicly available
information. Denali Investors recognizes that there may be confidential or otherwise non-public
information in the possession of the Company that could lead the Company to disagree with Denali
Investors conclusions.
The analyses provided include certain estimates and projections prepared with respect to, among other
things, the historical and anticipated operating performance of the Company. Such statements,
estimates, and projections reflect various assumptions by Denali Investors concerning anticipated
results that are inherently subject to significant economic, competitive, and other uncertainties and
contingencies and have been included solely for illustrative purposes. No representations, express or
implied, are made as to the accuracy or completeness of such statements, estimates or projections or
with respect to any other materials herein. Actual results may vary materially from the estimates and
projected results contained herein.
Denali Investors advises funds that are in the business of trading - buying and selling - public securities.
Denali Investors owns SHAW equity and SHAW option derivatives. It is possible that there will be
developments in the future that cause such funds to change their positions regarding the Company and
possibly increase, reduce, dispose of, or change the form of their investment in the Company.
Executive Summary
Why We Like SHAW
A Brief History
Conflicts of Interest
Valuation: Grossly Undervalued
Shareholders
Demanding Fair Value
Agenda
We believe the current deal with CBI at $46 per share is a sweetheart
transaction for CBI allowing them to steal SHAW on the cheap without a
proper auction process or an appropriate control premium.
The premature timing, depressed valuation, limited sale process, and total lack of
communication of the deal is explained by our learning that a major conflict of
interest exists with the Chairman's likely Louisiana senatorial (2014) or
gubernatorial (2015) campaign.
The Management and Board:
1) did not negotiate a go-shop period to solicit competitive offers,
2) did not form a special committee for the sale,
3) did not hold a customary conference call,
4) did not release presentation materials about the transaction,
5) did not file customary proxy materials, and
6) has refused to communicate with investors, analysts, and journalists.
There is ample evidence that the deal price is not the fair price that
shareholders deserve given the:
1) strength of SHAW's underlying business,
2) massively impactful unwind of the substantial Westinghouse investment, and
3) recent sale of the problematic and volatile E&C segment.
Executive Summary
Due to SHAW's high 75% supermajority voting threshold that excludes 5% and
greater holders, we estimate that ONLY 13% to 17% of shareholders voting
against the unfair terms will block the current deal.
We believe SHAW should be valued at $50 to $70 per share as a going concern
and $60 to $85 per share including a control premium.
We will continue to take all actions to protect our investment which includes
1) proxy solicitors/advisors, 2) legal counsel, 3) appraisal rights counsel, and 4)
independent inspector of elections.
Executive Summary Continued
We strongly encourage fellow shareholders to also vote against the deal, share
your concerns with SHAW, and demand to have SHAW form an independent
special committee and hire independent advisors to run a proper auction to
maximize shareholder value.
Why We Like SHAW
"Right now we feel like we are trading at one-
time EBITDA plus cash, so we haven't found
anything quite that economical out there so thats
where we look at it."
- Jim Bernhard
Chairman and CEO
CS Conference
Seems We're Not the Only Ones...
Stated July 7, 2012:
7
SHAW's Own Internal Projections
Shaw's own projections factor in a massive
increase in fundamental performance...
Source: CBI S-4 filing, 09/18/2012
Blue Skies Ahead
"Our balance sheet is strong, exceptionally strong. If you look at the balance sheet
we pretty much exclude the debt repayment to ToshibaWithout that we are pretty
much debt-free. Our forecast is $1.3 billion worth of cash at the end of our
fiscal year, which is in August [2012]."
- Jim Bernhard, July 2012 Earnings Call
"You're looking at today with $1.2 billion in cash, no debt, clean balance sheet,
good backlog, a lot of recurring revenue We're real excited about the future
of Shaw. Things are beginning to look positive, and our balance sheet is real
clean."
- Jim Bernhard, Call to Discuss Westinghouse Investment, September 2011
Fortress balance sheet, strong fundamentals, strong
backlog, recurring revenue...
Blue Skies Ahead
"I would think, you know, across the board, certainly, Power will accelerate. There's no
reason to conclude that Plant Services should not do better in '13 versus '12. E&I
should continue to perform well...
You know, F&M continues to perform well. Its core markets are doing extremely well
and improving -- we see improvement there in the core businesses. And then, also, you
have the ramp-up on the nuclear side.
So across the board, we would think that in 2013, there's opportunity for all of them to
improve... So we think the opportunity for growth is pretty broad across the --
across all the segments."
- Brian Ferraioli, CFO, July 2012 Earnings Call
An extremely positive view on 2013
Business is Good and Getting Better
"The nuclear power projects continue to ramp up. So you're going to continue
to see increased earnings and increased margins as the volume picks up in both
power and in F&M. And you're also going to have E&I again doing a good volume
quarter. And as the volume picks up on the revenue side, keep in mind that the
overheads are relatively flat."
- Brian Ferraioli, July 2012
"You know, while the backlog appears to be down in actuality working backlog... really
has increased quarter over quarter."
- Jim Bernhard, July 2012
In addition to a strong backlog, earnings and
margins are at an inflection point
Business is Good and Getting Better
"Theres certainly a lot of opportunity out there. Theres a lot of opportunity in the gas
market and construction and fabrication activity, particularly in Louisiana and Texas. So,
its going to be busy."
- Jim Bernhard, Earnings Call, July 2012
"It looks like there is a significant amount of [work] to be developed in our F&M market.
The power market is starting to have more certainty going forward and the E&I market
has an opportunity to secure some major projects, particularly in the Department of
Energy."
- Jim Bernhard, Earnings Call, March 2012
Management sees growth with near term conviction
across all business segments
"That said, and as before, we continue to note that smoother sailing should be
ahead as some of the past several years' noise abates."
- Research Analyst, July 11, 2012
"Shaw's earnings appear past the bottom, and we expect the company to start
delivering accelerated growth into 2012 and 2013. Shaw is arguably the only E&C
name in our coverage with leverage to the global nuclear construction cycle holding
alliance on two leading boiler technologies. We view risk/reward at this valuation as
attractive.
- Research Analyst, July 10, 2012
Research Analysts See the Turn
Legacy issues weighing on the stock but future
looks brighter...
Yet on July 30, 2012, Shaw Announces
Sale to CBI at only $46 per share
An Abrupt Flip-Flop
A 72% "Premium?" Don't be misled. The pre-deal price equates to
0x to 1x EBITDA (i.e. SHAW was selling for free)
"The deal offers an attractive 72% premium. We firmly believe the
transaction with (Chicago Bridge) is in best interests of and creates
significant value for Shaw's shareholders..."
- Statement by SHAW Investor Relations
A takeunder value below fair value and without a control
premium is not in the best interests of SHAW shareholders.
Situation Breakdown
SHAW is Grossly Undervalued...
Material discount to comps
No premium for control
Clean and de-risked operations
Fundamental inflection point
Situation Breakdown
Why is SHAW Misvalued?
Westinghouse phantom "debt"
FX charges (purely non cash)
E&C segment charges / losses
Appearance of volatility due to GAAP
So Why Do We Like SHAW?
Tremendous value can be unlocked.
The following misperceptions that have weighed on the stock will be/have
been corrected:
Westinghouse "debt" Gone
FX charges Gone
Book Value issue Gone
IS charges/losses Gone
E&C Segment Gone
The removal of misperceptions adds clarity for the future:
FCF positive
Clean and de-risked company
Significant cash balance optionality
The valuation gap can be closed
We believe SHAW is worth $50 to $70
per share stand alone
A Brief History
Provides asset management and maintenance services
to power and industrial facilities
Fabrication &
Maintenance
Power
Offers design, EPC, and related services to nuclear, coal,
and gas-fired power plants
Plant Services
Environmental &
Infrastructure
What is SHAW?
Handles program and construction management, site
remediation, coastal engineering services, logistics and
maintenance for the U.S. government and other clients
Fabricates piping systems for industrial and power
plants (and for distribution), and builds modules for new
nuclear power plants
20
Good Stewardship...
"We have a goal of progress, firmly
entrenched in the philosophy to remain
good stewards of the investment our
shareholders have made in our success
to date."
- Jim Bernhard
2010 Annual Letter
"We bought Stone and Webster and returned a lot of value to
shareholders there that you can't duplicate that deal. That was
too good to be true. We bought IT Group and the IT Group for
$125 million, made $90 million dollars the first year. You can't
duplicate that, that was too good to be true"
- Jim Bernhard, June 2012
A Sense of Creating Value
A Sense of Weighing Options
"Hell, with $1.3 billion, if you couldnt with 6 million shares
outstanding, if you couldn't take that $1 and make it $1 share
accretive [through an acquisition], but guess what? Thats not
the best thing because I think the best thing right now if I
had to look up all the things I know is to buy [SHAW]
stock at one-time EBITDA. Looks good to me."
- Jim Bernhard, June 2012
"Our fourth quarter, we will announce another loss of $85 million
associated with the increase in the value of the yen versus the
dollar. It has had an overhang on our stock. It is difficult for
investors, for many investors, to get their heads around when
they're looking at Shaw for the first time. So there have been a
number of reasons. It's [unwinding Westinghouse] something
we've been contemplating for quite some time."
"We firmly believe that the sale of our investment in Westinghouse is
the best interest of our shareholders and our future business
opportunities... Once the sale is final, Shaw will be essentially
debt-free, with a extremely strong balance sheet and the ability
to explore additional opportunities in the future."
- Jim Bernhard, Sep 2011
Removing the Overhang
"If it's correct in our assumption it [Westinghouse] has had
an overhang on the stock, clearly stock is one of the
currencies that we consider when we're looking at potential
transactions. So as Jim said before, net-net, we think this
is going to be extremely positive for our shareholders as
we move forward, and gives increased flexibility from a
financial perspective and strategic perspective."
- Brian Ferraioli, September 2011
Removing the Overhang
Analysts Also See Past Overhang
"We do believe the Shaw asset is much more attractive
now that Shaw has sold its E&C segment to Technip for
$300M."
- Research Analyst, July 31, 2012
"[I]ts important to remind investors that we think most of the
noise thats been an overhang on SHAWs stock could be
cleared up in the next several months."
- Research Analyst, August 2, 2012
"We also highlight that the company's Westinghouse investment continues to
distort investor perception of SHAW's underlying leverage, with the $1.6 billion in
Westinghouse bonds (essentially all of SHAW's debt) collateralized by the company's
decision last year to put its investment back to majority owner Toshiba (to be completed
in F1Q13), making SHAW comparatively much more attractive on an EBITDA
basis."
- Research Analyst, July 10, 2012
We also remind investors SHAWs intention to exercise put options to sell its
Westinghouse investment back to Toshiba (with the bonds settled in March 2013), which
should allay some of the confusion that we think tends to develop regarding
exactly how healthy SHAWs balance sheet is.
- Research Analyst, July 11, 2012
Analysts Also See Past Overhang
Analysts agree on the importance of the unwinding
of Westinghouse on investor perception
Due to the timing of the unwind, SHAW did not
realize a deserved valuation from analysts
Hiding in Plain Sight
Consequently, SHAW had the worst research
ratings profile among E&C peers
SHAW is trading at tighter spreads as the market
better understands the story
SHAW Stock Performance
0x - 1x EBITDA
3x - 4x EBITDA
CBI stock has quickly traded back to pre-deal levels after an initial
misreaction by the market, which now better understands the
significant benefits that will accrue to CBI
CBI Stock Performance
Market
misreaction
Market learning
benefits / accretion
Undervaluation is Increasing
Shaw's story and true value has been obscured by the now legacy
Westinghouse and E&C segment overhangs, resulting in a rock bottom
valuation that is finally poised to receive proper market valuation
Conflicts of Interest
Since when is a Bid higher than an Ask?
Upside-Down Sale Process
As we will show in our Valuation section, the valuation by SHAW appears
deliberately massaged to meet lower targeted ranges in order to facilitate a
rushed and conflicted transaction
33
With a positive track record of building value through
acquisitions, why is the recent selling record so poor?
FY Q2 2012 Earnings Call, Mar 2012 -
Research Analyst - "Okay. And then just on the E&C sale, is it possible just given
that the trends in that business continue to be strong maybe are getting
stronger? Is it possible to read into the delay that that segment might actually not be
sold or do you still have full confidence that is the likely conclusion here?"
Bernhard - "Anything is possible, but the likely conclusion is that we will continue to
execute our plan with the divestiture of E&C. Part of the delay -- this is the first time
we have ever had a divestiture of part of our business. We even misestimated
how long it would take and quite frankly, because of the ethylene market coming up in
the United States, there has been -- they had quite a few latecomers into the
process who had interesting offers. So let me leave it at that and we are moving
forward on our plan.We should have an announcement in the third quarter and
completion before our fiscal year-end.
Good Buyers, Suddenly Bad Sellers?
"SHAW announced it has entered into an agreement with Technip to sell substantially all
of its Energy & Chemicals (E&C) business for $300M in cash. This is towards the lower
end of expectations which ranged from $200M to $500M at the high end."
- Research Analyst, May 21, 2012
We would also remind investors that historically SHAW has a very good track record
of creating shareholder value through acquisitions.
- Research Analyst, July 12, 2012
"SHAW's balance sheet today offers opportunity, with a $500 million buyback
authorization and near-term deployment decisions (buybacks or M&A)
providing a potential catalyst before the end of the (fiscal) year."
- Research Analyst, July 10, 2012
Analysts Question the Disconnect
Why is SHAW selling now on the heels of its first divestiture
and with a massive cash balance to seek acquisitions or buy-
backs?
Conflicts - Political Analysis
In order to run a proper political campaign, a sale of SHAW must
occur while leaving a sufficient window of time. We believe the sale
was rushed and lacking proper process to fit this artificial constraint.
It is an open secret in Louisiana political circles that the Chairman is
a likely senatorial or gubernatorial candidate, which is corroborated
by his having served as Chairman of the Louisiana Democratic Party
Conflicts - Political Analysis
Bernhard can self-finance a campaign thereby
materially impacting the outcome
The incumbent senator has been increasingly unpopular and
reelected by a decreasing margin, with the previous election only
52% in favor.
The incumbent governor is precluded from election given a
consecutive two-term limit, hence creating an opening for the
seat
The upcoming election window is the perfect time to
maximize chances of political success
Board Member Analysis
Given such conflicts, how could Independent
Directors approve such an inadequate deal?
Unless they had not been properly informed...
Are Independent Directors truly "independent" in
their actions and understanding?
Independent Director Analysis
In 2007, CalPERS voiced dissatisfaction with SHAW
regarding out-of-line compensation practices
Previous Run-in with CalPERS
Shareholder Dissatisfaction
It's no surprise that prior voting indicates
shareholders dissatisfaction with SHAW directors
"As fiduciaries, each member of the Board of
Directors is responsible for the diligent
application of business judgement in the best
interests of the Company and its
shareholders."
- The Shaw Group Corporate Governance
Principles
Best Interests of Shareholders
It is the duty of each director to represent the best
interests of shareholders
The S-4 filing (by CBI) shows unusually little effort
or proper sale process by SHAW
Special Committee NO
Adequate Discovery NO
Adequate Diligence NO
Adequate Shopping NO
Effort for Control Premium NO
Yet Void of a Fair Deal Process
Why have investors and analysts not had a chance
to ask basic questions on an open call?
Customary Conference Call NO
Customary Presentation NO
Customary SEC Filings? NO
Yet a Total Lack of Communication
Why has SHAW not filed any specific materials
regarding the transaction?
Board is responsible to bring fair terms
to shareholders. They have failed.
Ultimate responsibility of a defeated
deal is with the board.
Such opposition would not exist if
appropriate terms were presented.
Failed Deal is Board's Responsibility
Valuation
SHAW Remains Grossly Undervalued
CBI is not paying a control
premium much less fair value.
How do we know?
Because they tell us...
47
An Upside-Down Transaction
Since when is a "Bid" (the buyer) HIGHER than an
"Ask" (the seller)?
"[The advisor]
applied the
current NTM
multiple of 2.8
x"!
No control
premium being
paid for SHAW
shares
Shoot First, Paint Target Second?
"Welcome to Moviefone... Why don't you just
tell me the name of the movie [value of the
company] you've selected.
- SHAW's Financial Advisor
SHAW's Projection Ramp Tells Story
Moreover, SHAW's internal EBITDA projections are
more than double even CBI's!
Typically, a buyer and seller can meet in the middle on price. If
the buyer is aggressive, they pay up to the seller's Ask. If the
seller is pressed, they move down to the buyer's Bid.
In this case, with SHAW appearing to be pressed for time due to
conflicts of interest despite dramatically better projections,
the entire process was turned upside down with the seller's
(SHAW) Ask ending up BELOW the buyer's (CBI) Bid.
We believe SHAW's unjustifiably low valuation was forced
as to facilitate a transaction of convenience for the
Chairman without proper regard to shareholder interests.
Reading Between the Lines
Given the recent extended delays for just the sale of the E&C
segment alone, the sale process for SHAW itself appears
tainted and rushed
CBI Gets SHAW for a Steal
CBI has overstated the deal price for SHAW, and understated
the massive accretion. Little wonder they refuse to provide a range
for accretion guidance!
Current Valuation
At the current price, SHAW is undervalued at only 4.6x 2013E
EBITDA and 2.7x 2014E EBITDA before synergies
The Westinghouse investment was automatically put back to Toshiba on Oct. 6,
2012.
The associated $1.7b in phantom 'debt' including FX losses of $130m to $200m per
year flowed through for the duration of the investment since 2006. However, the
associated 'asset' remained unadjusted. In addition, no value was allowed to be
given to the 'put' option which has now been exercised. Hence, these purely fictional
accounting 'losses' flowed through the financial statements with no offsetting item,
resulting in persistent investor confusion.
In addition, the E&C business had huge write downs and negative EBITDA. The E&C
segment sale to Technip closed August 2012.
Rear View: Ugly, Front View: Pretty
Westinghouse and E&C segment were massive
drags on SHAW fundamentals...
...but are now no longer issues, leaving a SHAW
that is clean and de-risked
The now de-risked SHAW is worth $50 to $70 stand alone and
$60 to $85 with a control premium
Valuation Summary
Shareholders
Current Advisors
Proxy advisory services
Proxy solicitation services
Legal counsel
Appraisal rights legal counsel
Independent inspector of elections
Preparing for Further Actions
As shareholders, we are acting to protect our
investment
57
Institutional
Shareholders
of SHAW
Shareholder Geographic Analysis
As a "fly-over" state, institutional shareholders are
unaware of Louisiana's open political secrets...
No
Overlap
People that
live in
Louisiana
SHAW is a Louisiana domiciled corporation
Approval is above a simple majority vote of 50%+ and requires a
75% supermajority threshold
However, 5%+ shareholders are excluded from this calculation in
an attempt to counter conflicts of interest
Importantly, rather than requiring over 50% of the vote to block
a deal, SHAW only requires a fraction of that amount, roughly
only 15%, to prevent a conflicted takeunder deal
Deal-Specific Items
SHAW has an unusual structure that provides
concerned shareholders with tremendous leverage
Against Vote Analysis
We estimate that only 13% to 17% of Against
votes will block the current unfair deal
Current terms are unacceptable
Vote Against!
Do not allow CBI to steal value that is rightfully
yours
Do not allow conflicted board members to short
change your ownership of SHAW
Shareholder Action - Vote NO
In light of the conflicts and issues surrounding this
deal, we urge shareholders to vote against the deal
Although 5%+ holders are excluded from the 75% supermajority threshold, 5%+
holders are INCLUDED in the vote needed to advance Appraisal Rights.
The threshold to advance Appraisal Rights is only 20%+ of shares outstanding.
Therefore, if a shareholder is unsatisfied with the current deal consideration,
appraisal rights may provide a great deal of upside, with a floor being the current
terms.
Appraisal is NOT class action and allows shareholders to capture value that rightfully
belongs to them.
Timing requires you to submit before the regular vote.
Ultimately, we believe all shareholders have the same incentives: Get a fair price.
Recourse for Shareholders
Concerned shareholders may pursue Appraisal
Rights as a way to extract fair value
Assert your basic rights as an owner of SHAW
Contact the members of the board to voice your
concerns
Demand immediate inquiry of the sale process
Demand immediate inquiry of conflicts of interest
Demand an Investigation
Concerned shareholders should demand independent
directors investigate the broken sale process
Call: (225) 932-2500 (Main)
Contact: John Donofrio, General Counsel
John.Donofrio@shawgrp.com
(225) 932-2502
Gentry Brann, VP of Investor Relations
Gentry.Brann@shawgrp.com
(225) 987-7372
Brian K. Ferraioli, Chief Financial Officer
Brian.Ferraioli@shawgrp.com
Email: Board of Directors
Board@shawgrp.com
Write: Board of Directors
The Shaw Group
4171 Essen Lane
Baton Rouge, LA 70809
Voice Your Concerns
Do not allow board member conflicts and inaction to
short change the fair value of SHAW
We plan to retain an independent inspector of elections
We plan to commission forensics and DTC monitoring
An institutional shareholder likely has multiple custodian banks,
resulting in votes being entered through various channels and
names. For example, four institutional shareholders may have
eight to twelve custodian banks through which votes will be
entered.
Our goal is to prevent abuse and under-representation of
shareholder interests and to ensure proper attribution
Independent Inspector of Elections
Given SHAW's pattern of behavior, we have
concerns about a proper voting process
Shareholders Deserve Better
Shareholders deserve better
than a board that has
completely refused to engage
all constituents at any level and
whose strategy since deal
announcement has been
RADIO SILENCE
Demanding
Fair Value
Question:
How can all SHAW
constituents reach a win-
win?
68
The Answer:
Independent Directors need to
fulfill their duties
(before shareholders are
forced to do it for them)
Form a Special Committee
Retain independent financial
and legal advisors
Run a full sale process
Get a fair price
What Must be Done Now
How Independent Directors Win
Your tarnished reputations will be repaired
You will fulfill your fiduciary duties
You will have run a proper sale process
You will have received proper independent
financial and legal advice
You will obtain a fair price for all shareholders
You will be viewed as truly independent
We obtain a fair price in a properly managed sale
process
We have restored confidence in the independent
directors as true shareholder representatives
Alternatively, we remain as a clean and de-
risked ongoing concern if current deal is
rightfully voted down
How Shareholders Win
The Board must get a fair price
The Board must run a full sale process
Independent Directors must form a
special committee with separate financial
and legal advisors
Shareholders will applaud your actions
We will continue to take all actions to
protect our investment
Timetable
Concerned shareholders should be aware of the
following upcoming events
www.ShawFairValue.com is a collection of
resources for concerned shareholders of SHAW
Visit the website for further information
Visit www.ShawFairValue.com
SHAW Contact Information
Call: (225) 932-2500 (Main)
Contact: John Donofrio, General Counsel
John.Donofrio@shawgrp.com
(225) 932-2502
Gentry Brann, VP of Investor Relations
Gentry.Brann@shawgrp.com
(225) 987-7372
Brian K. Ferraioli, Chief Financial Officer
Brian.Ferraioli@shawgrp.com
Email: Board of Directors
Board@shawgrp.com
Write: Board of Directors
The Shaw Group
4171 Essen Lane
Baton Rouge, LA 70809
76