Capital Markets

Halliburton Reaps Benefits of IPO

The shares of KBR, the parent company's slow-growing subsidiary, rose more than 22 percent on their first day of trading last Thursday.
Stephen TaubNovember 20, 2006

Call it a win-win for Halliburton. When a company takes a slower-growing subsidiary public, the parent generally reasons that investors will be in a better position to value the two companies. And that could result in a higher total combined value for the entities.

The motivation for such an IPO by Hall of its KBR subsidiary were surely on offer in the third quarter, when KBR accounted for 42 percent of Halliburton’s revenues but just 10 percent of its operating earnings.

Sure enough, in the days since Halliburton, formerly run by vice president Dick Cheney, sold a nearly 20 percent interest of KBR in a long-planned initial public offering late last week, it has already reaped a number of benefits.

For one thing, the shares of KBR, formerly known as Kellogg, Brown, & Root, rose more than 22 percent on their first day of trading last Thursday. The shares of both rose in the following trading days as well.

This rapid run-up lifted the value of the roughly 80 percent stake that Halliburton retained in the U.S. military’s top contractor in Iraq, according to the Wall Street Journal.

Halliburton plans to spin off KBR next year in a tax-free transaction. Under the IPO deal, most of the $473.3 million proceeds will be used to repay inter-company subordinated notes to Halliburton, enabling the parent to reduce its debt.

As a result of the debt reduction, Moody’s boosted its outlook on Halliburton’s debt to positive from stable. The rating rise reflected the benefit of Halliburton’s separation from KBR’ lower-return businesses and the parent company’s expected future insulation from most of KBR’s ongoing legal contingencies.

Those legal contingencies include guarantees and indemnifications for a variety of letters of credit and surety bonds, a lingering dispute in arbitration over KBR’s liability for performance on a project in Brazil (called the Barracuda-Caratinga project), and the U.S. government’s investigations of a KBR affiliate under the Foreign Corrupt Practices Act, according to the debt rater. The FCPA probe concerns illegal payments related to the so-called Bonny Island LNG project in Nigeria.