One of the most interesting merger and acquisition deals of the year occurred this month when Cameco Corp. (CCJ, Financial) agreed to purchased Westinghouse Electric from Brookfield Business Partners (BBU, Financial). Cameco mines and markets uranium, while Westinghouse provides various services to nuclear power plants around the world.
Cameco operates through two segments, Uranium and Fuel Services. The uranium segment explores and mines this important metal and also purchases and sells uranium concentrate. The fuel services segment refines, fabricates and converts uranium concentrate. Headquartered in Saskatoon, Canada, the company sells its uranium and fuel services to nuclear power plants around the world.
As for Westinghouse Electric, it services roughly half the nuclear power generation sector and is the original equipment manufacturer to more than half the global nuclear reactor fleet. The company has high levels of intellectual property and a specialized workforce that are capable of operating in highly regulated and sensitive markets. Approximately 85% of its revenue comes from long-term contracts or highly recurring customer service provision with almost a 100% customer retention rate.
Founded in 1988, Cameco currently has a market capitalization of over $10 billion. Revenue is expected to exceed $1.8 billion next year as the price of uranium is expected to remain strong.
The transaction
Cameco and Brookfield Renewable Partners (BEP, Financial) are forming a strategic partnership to acquire Westinghouse. Brookfield Renewable, with its institutional partners, will own a 51% interest in Westinghouse and Cameco will own 49%. The justification for the deal is to bring together Cameco’s expertise in the nuclear industry and Brookfield Renewables' expertise in clean energy to put nuclear power at the heart of the ongoing clean energy transition.
The total enterprise value to be paid for Westinghouse is $7.9 billion. The company's current debt of $3.3 billion will stay in place with the remaining equity purchase to be $4.5 billion. Brookfield will pay $2.3 billion and Cameco will pay $2.2 billion. Cameco will issue $748 in equity itself to help pay for the deal without taking on too much debt.
In a statement, Brookfield Vice Chair and Head of Transition Investing Mark Carney said, “Every credible net-zero pathway relies on significant growth in nuclear power. It is an essential, reliable zero-carbon technology that directly displaces fossil fuels and supports the growth of renewables by providing critical baseload to our grids. The partnership of Brookfield and Cameco will help drive forward the growth of nuclear power the world needs for its clean energy transition.”
The CEO of Cameco, Timothy Gitzel, also touted the deal, highlighting the revenue diversity and how the company will be involved in all aspects of the nuclear supply chain.
Financial review
Cameco’s second-quarter results benefitted from higher realized uranium prices, which gained 75% compared to the prior-year period due to an increase of 41% in the Canadian dollar average realized price and a 25% increase in sales volume. The average U.S. dollar spot price for uranium increased by 63% compared to the year-ago period, while the U.S. dollar average realized price only increased by 38% because of the impact of fixed price contracts.
As of June 30, the company had $1.4 billion in cash and cash equivalents and short-term investments and $997 million in long-term debt. In addition, it had a $1 billion undrawn credit facility.
Valuation
Cameco’s revenue and earnings are often quite volatile as results are usually tied to uranium spot prices and other geopolitical events. For example, earnings per share this year is expected to be only around 25 cents, but in 2023, some estimates go as high as $2 per share. If the company can maintain earnings power of over $2 per share in the next two to three years, then Cameco appears to be undervalued. These $2 earnings estimates take into account the Westinghouse transaction, which appears to be accretive. The post-transaction net asset value is expected to be over $37 per share according to one analyst.
The company currently pays a tiny dividend of 9 cents on an annual basis, which equates to a 0.41% dividend yield.
Guru trades
Gurus who have purchased Cameco stock recently include Joel Greenblatt (Trades, Portfolio) and PRIMECAP Management (Trades, Portfolio). Among those who have reduced or sold out of their positions were Ray Dalio (Trades, Portfolio)'s Bridgewater Associates and Charles Brandes (Trades, Portfolio).
Conclusion
On a standalone basis, Cameco was poised for solid profitable growth based on the industry outlook for sustained or higher uranium prices. The company operates high-quality uranium mining and exploration infrastructure to fuel that potential growth.
The Westinghouse deal, which may take a year to close, offers additional revenue diversification and gives the combined company the ability to take advantage of the whole nuclear supply and operating chain. Nuclear power, generally speaking, is expected to see significant growth, which will be driven by the need for energy security and decarbonization trends.
