Business: KBR provides science, technology and engineering solutions to governments and companies around the world. The company operates in two divisions: Government Solutions and Sustainable Technology Solutions. Its Government Solutions (GS) business unit provides a full range of solutions for defense, intelligence, space, aviation and other military and other government agencies in the United States, United Kingdom and Australia. Its Sustainable Technology Solutions (STS) business unit is based on technology that spans ammonia/syngas/fertilizers, chemicals/petrochemicals, clean refining and circular/circular economic processes.

Stock Market Price$7.91B ($59.36 per share)

In recent weeks, government contractors, including KBR, have faced cutbacks across the board in response to threats posed by the Trump administration. Investors have been speculating that the new Department of Government Efficiency (DOGE), which is responsible for reducing federal spending, is already promising to cut $2 trillion from the federal budget, may result in lower profits for government contractors. As a result, between Election Day and the report that Irenic made a position in the company, KBR shares fell more than 18%. However, KBR may be unfairly punished by the DOGE’s decision. In fact, KBR appears to be more protected from these threats than the market is expecting. First, while the company’s GS business accounts for 75% of KBR’s revenue, it contributed less than half of its revenue in FY23. In addition, 25% of GS’s business is international, mainly in the UK, protected from the effects of DOGE. Looking at the remaining 75% of the segment in the US market, a closer analysis shows that the smaller segments of KBR’s operations are the ones expected to face any cost-related challenges. Although details are still unknown, the threats to the GS sector seem, for now, to be serious. In addition, the STS sector may benefit from the upcoming plans. Under the Biden administration, there was a freeze on export permits for LNG plants and several projects were put on hold. The Trump administration plans to change that, which could be difficult for KBR as the company has a chance to win new and existing projects.

Perhaps lured by the drop in KBR’s share price following the recent price shock, Irenic has now entered the picture. Irenic has acquired a more than 1% stake in the company and is urging management to divest its STS stake. These are different businesses with unique needs, regulatory requirements and end markets. Non-unitary companies should be separated for several reasons: (i) each can attract the right shareholders and be given several rights; (ii) each may commit to managing management and compensation to meet business needs; and (iii) divestment may result in lower corporate income, creating smaller and more efficient businesses. KBR currently trades at approximately 11.5 times business to trailing 12 months EBITDA. Looking at peer companies, GS usually trades at multiples, but the likes of STS earn a multiple of 14-15 times EBITDA. Separating the two would have to recalculate the STS business to generate value for shareholders before saving any costs from the separation. By separating the two businesses, there would be no need for much of the business capital that the company generates, which could result in $50 million in revenue at the end of the year. Finally, ahead of any value creation, the company may repurchase stock to generate additional shareholder value. While each profit-making strategy on its own may not be very compelling, the combination could result in a 50% increase in shareholder value.

Irenic is not the only sharer who thinks that separation is reasonable; many others share this view. To put it differently: Keeping the two companies together doesn’t make sense. A few years ago, it would have been reasonable to say that a change in STS was impossible due to its size and youth. In 2021, the division paid $30 million and a few years later, management made good on the argument that the division had to be big enough to break even. But STS now generates about $400 million of EBITDA, and it’s time for management to move. Irenic likes to work behind the scenes with management and use the power of persuasion to win the day. We expect the company to continue doing this until KBR announces a technical review or the company’s deadline on Feb. 14, 2025, whichever occurs first. If no satisfactory declaration is made by Feb. 14, we can expect Irenic to do what he has never done before – start a proxy fight. However, given the support of the shareholders in the separation and the fact that there is an empty seat (General Lester L. Lyles) has been announced recently will retire from the board after the 2025 annual meeting) we don’t expect it to come to that. If Irenic is given a seat on the board, it may be for an independent director with more experience in the industry than an Irenic executive.

If KBR follows suit, we’d be remiss if we didn’t mention the equivalent. Elliott Investment Management has recently encouraged on the separation of Honeywell into two companies, and Honeywell announced later the wise examination about his businesses. Honeywell could be a successful acquirer of parts or all of KBR. Irenic’s co-founder, Adam Katz, was a former employee of Elliott Investment Management, and I’m sure he still knows people there.

Ken Squire is the founder and president of 13D Monitor, a shareholder protection research organization, and the founder and portfolio manager of the 13D Activist Fund, a mutual fund that invests in 13D assets.