Wall Street Digs Fluor's Shedding of Mining Unit

By E. SCOTT RECKARD

June 9, 2000 12 AM PT

TIMES STAFF WRITER

Fluor Corp.’s bold decision to separate its Virginia coal-mining operations from its main engineering and construction business was roundly applauded on Wall Street on Thursday as investors sent the company’s stock up 10%.

The Aliso Viejo company said the change would allow each operation to succeed by focusing better on independent growth strategies and allowing shareholders a clear choice of investing in both firms or in one industry.

The company said it will create a new Fluor Corp. to operate as a top builder worldwide of large oil field projects, dams and airports. The new company also is expanding into telecommunications, business services and other areas.

Its A.T. Massey Coal Co. in Richmond, Va., will be turned into a stand-alone, publicly traded company that can take advantage of its profit-generating ability to acquire other mining companies. It will be called Massey Energy Co.

Wall Street, which never cared for the disparate operations under one corporate roof, responded to the news by pushing the company’s stock up $3.19 a share to close at $35.44 in New York Stock Exchange trading.

The price is still well below a high of $48.50 in January, and less than half the share price before overexpansion, shrinking profit margins and economic troubles in Asia clobbered the company three years ago.

“I think the market never thought the management would take this kind of bold action,” said Bear, Stearns analyst Michael S. Dudas. “For years, people said, Philip Carroll Jr.

‘Why doesn’t Fluor sell the coal business?’ . And they always just said, ‘Well, we’re looking at it.’ ”

Letting Massey stand alone had long been an option for Fluor, though few analysts believed Fluor would cut its ties to the coal operation

Massey, after all, has been highly profitable during nearly 20 years of Fluor ownership, shoring up the engineering and construction operation during its slumps, and remains fundamentally strong despite a recent downturn in coal prices.

But Philip Carroll Jr., who became chief executive in July 1998, said his first priority was cutting overhead and reorganizing Fluor’s core businesses, a process that included wiping out 5,100 jobs, about 400 in Orange County.

That accomplished, his attention turned to Massey, which Carroll decided has better prospects as a separate business. The slump in coal prices has put many competitors in dire straits, creating a chance for the still-strong Massey to grow through acquisitions, Carroll said.

“You couldn’t do that at Fluor,” he said. “The strategy was not to create a bigger and bigger coal company.”

With revenue of $12.4 billion and net income of $104.2 million in its last fiscal year, Fluor is one of Southern California’s biggest companies, employing 47,000 people worldwide, including 2,500 locally.

The company expects the split to occur in about six months, pending approval by shareholders and regulators.

For each share of Fluor stock, investors will wind up with a share in each company. The deal is expected to have no effect on Southern California jobs, said Fluor spokesman Keith Karpe, because “all the Massey people are back in Virginia.”

The coal business once was part of the St. Joe Mineral Corp., a mining concern that Fluor purchased in 1981 in an ill-fated diversification strategy. When commodity prices fell later that decade, Fluor sold St. Joe’s gold and lead operations, but it hung onto the profitable coal business, a major source of cash for the cyclical construction business.

Massey will remain based in Richmond with its current head, Don Blankenship, becoming chairman and chief executive. It had an operating profit of $147 million last year on $1.1 billion in revenue--or 37% of Fluor’s total operating profit on about 9% of the total revenue.

For investors, a stand-alone Fluor will likely be a positive thing, analysts said

“People who want to buy a pure engineering and construction company don’t want to buy an unrelated coal business,” said Richard A. Henderson, an analyst at Donaldson, Lufkin & Jenrette’s Pershing division.

He said that Fluor’s prospects have been looking up because OPEC, the international oil cartel, appears able to maintain higher oil prices and because economic expansion is likely to continue in Asia.

However, two credit rating agencies, Moody’s Investors Service and Standard & Poor’s Corp., warned that they will review the companies for a possible downgrades of debt securities.

While Fluor will move much of its $842 million in debt to Massey, it will lose the heavy cash flow from coal that has been a stabilizing factor, analysts at the credit services noted.

Carroll said Fluor officials are confident of reassuring the agencies about both companies. Massey’s debt load will be far less onerous than that of most coal companies, he said, predicting the mining concern will emerge with a “BBB” credit rating, at the low end of investment grade. He said he believes Fluor will retain its “A” debt rating.

(BEGIN TEXT OF INFOBOX / INFOGRAPHIC)

Fluor Spinoff

A look at the two companies:

Fluor Corp.

Headquarters: Aliso Viejo

CEO: Phillip J. Carroll, Jr.

1999 revenue: $11.3 billion

1999 operating profit: $252 million

Employees: 43,700

Business: Engineering and construction

Fluor’s engineering and construction divisions 1993-1999

Revenue (in millions)