Insights

Why MasTec Shares Are Falling Today

What happened

Construction company MasTec (NYSE: MTZ) is making a big bet on clean energy and infrastructure, agreeing to buy Infrastructure & Energy Alternatives (IEA) (NASDAQ: IEA) for $1.1 billion in cash and stock. Investors in the two companies had mixed reactions, with shares of IEA up nearly 30% and shares of MasTec down 10% in Monday morning trading.

So what

MasTec is a construction and engineering company that has long had ties to the energy industry, working on some of the largest oil and gas, power generation, and power delivery projects around the world. The company’s deal for IEA would also make it a leader in renewables. The target has completed more than 260 utility-scale wind and solar projects across North America.

“We are proud to expand our service capabilities, scale and expertise providing critical infrastructure to support the nation’s energy transition to secure and sustainable renewable sources,” MasTec CEO Jose Mas said in a statement.

Terms of the deal call for IEA shareholders to receive $14 per share, comprised of $10.50 in cash and 0.0483 MasTec shares, for each share they own. MasTec has entered into agreements with IEA holders who collectively own about 35% of the stock.

MasTec also said it expects to earn about $3.09 per share in 2022, down from a previous range of $4.22 to $4.47 per share. Mas attributed the cut to “higher expected project costs, inefficiencies and delays including the impact of higher fuel, labor and material costs from sustained levels of inflation.”

Now what

There’s sound logic in the deal announcement. MasTec’s existing energy business, when combined with IEA, creates a one-stop shop of sorts for energy companies looking to create new renewable energy projects. A merged MasTec would be able to build not just the project, but also the transmission lines and other infrastructure needed to connect the power source to the grid.

Similarly, the cut in profitability should be solved over time as MasTec bids for new projects with the higher fixed costs factored in. Mas said he expects by 2023 the company will be able to “generate strong revenue and adjusted EBITDA growth” again.

But for now, MasTec faces the difficult task of merger integration and tough cost headwinds that are likely to crimp operations in the months to come. However strong the promise of this business is, investors on Monday appear content to watch from the sidelines.

Lou Whiteman has no position in any of the stocks mentioned. The Motley Fool recommends MasTec. The Motley Fool has a disclosure policy.

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