General Electric Co. (GE) is tapping proceeds from the sale of NBC to fund its $3.3 billion purchase of Lufkin Industries Inc. (LUFK) as Chief Executive Officer Jeffrey Immelt takes advantage of an oil-drilling boom.
Oil and gas has become GE’s fastest-growing segment with sales since 2009 up 57 percent to $15.2 billion amid a shale-oil boom poised to make the U.S. the world’s largest crude producer. Revenue at Lufkin, which makes artificial lift equipment that brings crude and other materials to the surface, rose 37 percent last year to $1.3 billion.
“They’re buying the synergies, the growth,” said Brian Finneran, an analyst at William Blair & Co. in New York, which rates GE market perform. “It’s a hot space. They’ve done a couple deals in the past there.”
Buying companies like the oil machinery-maker is a component of Immelt’s strategy to expand in manufacturing while shrinking GE Capital after the global financial crisis. GE’s new three-year incentive plan rewards the CEO in part for increasing industrial profit, heightening the motive to spend some of the $16.7 billion in cash from NBC for deals.
GE agreed to sell its 49 percent stake in NBC Universal to Comcast Corp. on Feb. 12 and announced plans to increase the size of its share repurchase program the same day. The divestiture also gave the company “the flexibility to do more M&A,” Chief Financial Officer Keith Sherin said at the time.
Lufkin holders will receive $88.50 per share in cash, and the deal should close in the second half, GE said in a statement today. The price is 38 percent more than Lufkin’s $63.93 close on April 5.
GE is paying about 13.5 times estimated 2013 earnings before interest, taxes, depreciation and amortization. That compares with a median of 11.5 times trailing 12-month Ebitda that buyers paid in a survey of more than 30 comparable deals, excluding Lufkin, over the past decade, according to data compiled by Bloomberg.
“It’s a little rich, but there’s a lot of fat to cut there” to lower the Lufkin, Texas-based manufacturer’s costs and improve profit, Finneran said.
Lufkin surged 38 percent to $87.96 in New York, the largest increase since November 1990. Fairfield, Connecticut-based GE rose 0.8 percent to $23.12.
GE shares previously gained 9.2 percent this year compared with an 8.9 percent climb for the Standard & Poor’s 500 Index and a 10 percent advance for Lufkin.
The proposed takeover is among the three largest of an oilfield machinery and equipment company over the past decade, data compiled by Bloomberg show. Bloomberg News reported in September that Lufkin was shaping up as a deal target after the company fell to its lowest valuation in almost three years.
Lufkin will more than double GE’s share of the artificial lift segment and give it about 15 percent market share, Julian Mitchell, an analyst at Credit Suisse in New York, wrote today in a note to clients.
“As high as 94 percent of existing oil wells are going to require some form of artificial lift,” Daniel Heintzelman, CEO of GE Oil & Gas, said in a telephone interview. “This gives us more of a chance to become a comprehensive player.”
Lufkin has 4,500 employees in more than 40 countries. It makes pumping units, hydraulic submersible pumps, power transmission equipment and well automation systems.
“The fit is solid,” New York-based Sanford C. Bernstein analyst Steven Winoker, who holds a market perform rating on GE, wrote in an e-mail. “The price seems very high considering the challenges and expectations in North America drilling.”
GE expects $60 million of cost savings from the acquisition over five years, mainly from consolidated purchasing,Heintzelman said. Redundant headquarters staff probably will be offered new positions and field staff will be kept because the “industry is under terrible pressure for talent,” Heintzelman said.
GE also plans to more broadly market Lufkin’s products including beam pumps, known as nodding donkeys, that are ubiquitous on oilfields, Heintzelman said in the interview.
The acquisition announcement followed GE’s plans to invest $110 million in a research lab in Oklahoma City to study ways to improve extraction of hard-to-reach oil and gas deposits, including hydraulic fracturing and horizontal drilling.
That facility will hire as many as 125 engineers and scientists in the coming months and will eventually expand its research to more conventional drilling techniques, Chief Technology Officer Mark Little said in a telephone interview.
GE previously expanded in the energy industry with $11 billion of purchases during a six-month period ended in 2011.
Simmons & Co. provided financial advice to Lufkin, while Bracewell & Giuliani served as legal adviser. Goldman Sachs Group Inc. and Deutsche Bank AG acted as financial advisers to GE, with Weil Gotshal & Manges LLP offering legal guidance.