Chicago Bridge & Iron Co (CBI.N) said on Monday it would buy Shaw Group Inc (SHAW.N) for about $3 billion in cash and stock to create a big engineering and construction company focused on the energy industry, but Shaw shares traded below the offer price, suggesting some investors worry the deal may not close.

Netherlands-based CB&I offered $46 per share - $41 in cash and $5 in CB&I stock - a premium of 72 percent to Shaw's closing price on Friday, the companies said.

Shaw shares jumped 54.7 percent to $41.31 in afternoon trading, well below the offer price, while CB&I stock fell 14.6 percent to $34.74.

The deal will increase CB&I's debt load and move it away from its core expertise in the oil and gas industry, while potentially making earningsmore volatile, analysts said.

"You're seeing an adverse reaction from CB&I shareholders to the deal," said energy infrastructure analyst Robert Norfleet of BB&T Capital Markets. "They feel like this came completely out of left field. This is more of a transformational acquisition, not a bolt-on acquisition, (which) management had indicated ... There's concern you're creating a higher-risk profile company."

The deal requires the approval by both companies' shareholders. It is unusual in a mostly cash deal for shareholders of the acquiring company to have a vote. However, Dutch law requires investors have a say in transformative deals; CB&I is a Dutch company with Texas administrative headquarters.

ENERGY INFRASTRUCTURE CONSOLIDATION

By buying Shaw, which builds nuclear power plants and retrofits coal-fueled plants to be less polluting, CB&I expands in the power generation market. CB&I is also taking advantage of Shaw stock that's been beaten down by management missteps and worries over cost overruns at nuclear projects, Norfleet said, adding more M&A in the construction and engineering space was likely. Shaw shares had traded at more than $70 in 2007.

Shares of other engineering stocks initially jumped but gave up most of their gains. Fluor fell 1 percent, Foster Wheeler AG (FWLT.O) was up 1 percent, URS Corp (URS.N) shares were down 0.5 percent, and KBR Inc (KBR.N) lost 0.7 percent. AECOM Technology (ACM.N) and Jacobs Engineering Group Inc (JEC.N) were trading down 0.7 percent and 0.5 percent, respectively, after early gains.

The deal was the first sizable transaction in the energy and construction field since URS announced the purchase of Canadian oilfield services company Flint Energy Services (FES.TO) for C$1.25 billion (US$1.25 billion) in February, defying expectations for an active year in M&A given energy companies' huge cash piles.

CB&I and Shaw's combined backlog of work, an indicator of future revenue over several years, will be about $28 billion, or nearly twice the backlog at other leading publicly traded U.S. engineering and construction companies, apart from Fluor Corp (FLR.N) with $42.5 billion.

POWER PLAY

Shaw will continue as a business segment branded as CB&I Shaw. Shaw Chief Executive Officer J.M. Bernhard Jr will retire after the deal closes in early 2013, and CB&I CEO Philip Asherman will lead the combined company.

"We'll be diversified across the entire energy sector, enabling us to capitalize on all the growing global demand for energy," Asherman said on a conference call with analysts.

Asked which markets were most attractive to CB&I, Asherman named growth prospects in power generation.

"The whole area around power certainly is very, very interesting," he said. "We'll look now at how you can take CB&I's global footprint and expand those opportunities to some of the overseas markets."

Baton Rouge, Louisiana-based Shaw provides engineering, construction and maintenance services to oil companies, manufacturers, and utilities. It recorded 2011 sales of $5.9 billion and employs about 27,000 people. Shaw is a leading maker of pipes and erects nuclear power plants, including in China.

Shaw has been streamlining its business. It said in May that it would sell its energy and chemical division to French oilfield services group Technip (TECF.PA) for $300 million. In 2011, it set the sale of a 20 percent stake in nuclear power plant company Westinghouse Electric Co to Japan's Toshiba Corp (6502.T) to eliminate nearly $1.7 billion of debt.

Shaw said as recently as September it was itself hunting for acquisitions.

CB&I, whose clients include energy companies like Chevron Corp (CVX.N) and Exxon Mobil Corp (XOM.N), makes technology to refine crude oil and is the world's largest maker of storage tanks. It said it would use cash of both companies, along with about $1.9 billion in debt, to finance the acquisition.

The deal will add to earnings in the first year, CB&I said. The company, with administrative headquarters in The Woodlands, a Houston suburb, said it did not expect its Dutch incorporation to be an obstacle in winning U.S. government contracts. The company, formerly part of Praxair (PX.N), incorporated in the Netherlands in the 1990s, partly for tax reasons, according to its 1996 registration statement.

Bank of America Merrill Lynch (BAC.N) is the financial advisor to CB&I. Morgan Stanley & Co LLC (MS.N) advised Shaw.

One investor made a stunning return by placing some well-timed bullish bets in Shaw options last week, raising eyebrows among options market watchers.

According to several options market participants, one investor purchased 2,000 Aug $29 calls in Shaw for 25 cents a piece on Thursday. With Shaw shares hitting $43.70 on Monday, the calls were worth about $14, a stunning 5,600 percent return for the investor.

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