General Electric Co. agreed to buy oil-field equipment maker Dresser Inc. for $3 billion, expanding its biggest industrial unit, as Chief Executive Officer Jeffrey Immelt begins spending cash accumulated over the past two years.
The purchase of closely held Dresser will add to earnings next year, GE said today. The deal should “close promptly” after receiving regulatory approval, GE said, without elaborating. Dresser had $2 billion in 2009 revenue.
GE said in July it expects about $25 billion in discretionary cash at the end of 2010 as economies improve and performance of its finance unit stabilizes. Immelt, 54, raised the dividend in July and is buying back shares, bolstering research and development budgets and making acquisitions.
“One of the levers GE needs to pull is wise capital allocation decisions, to spur earnings growth in 2011 and 2012,” said Joel Levington, a managing director of corporate credit at Brookfield Investment Management Inc. in New York who follows GE. “The size and strategic fit of Dresser works well, in our view, as it adds product breadth to a core unit.”
Dresser’s majority owners are funds managed by Riverstone Holdings LLC and First Reserve Corp. The Addison, Texas-based company has 6,300 employees and posted earnings of $318 million in 2009, according to the companies’ statements.
GE adds industrial valves and pumps to compete with companies such as Tyco International Ltd., Flowserve Corp. and Emerson Electric Co., according to Jeffrey Sprague, a partner in Stamford, Connecticut-based Vertical Research Partners Inc. GE also bolsters offerings in meters and power compression, with about two-thirds of Dresser’s total business from the oil-and-gas industry, he wrote in a note to clients.
“The price appears reasonable,” Sprague wrote, He estimated that Dresser would contribute about 1 cent a share to profit starting in 2011 and a return on invested capital of at least 10 percent during the next five years. Sprague rates shares of Fairfield, Connecticut-based GE a “hold.”
Oil-field service and equipment companies are “cruising in the sweet spot,” analysts at Tudor Pickering Holt & Co. wrote today in a note to investors. Companies tied more to natural-gas projects have performed better this year because of the greater amount of work on those wells compared with oil wells, Joe Hill, an analyst at Tudor Pickering in Houston, said in a telephone interview. That could change as oil continues to rise and generates more activity, he said.
There have been 43 acquisitions announced worldwide in the past year in which the target was a closely held company in the oil-field machinery and equipment industry, according to data compiled by Bloomberg. The average size was $85.2 million.
“We’re doing this deal to grow it,” Vice Chairman John Krenicki, who oversees the energy businesses as chief executive, said of Dresser in an interview. “We know the customers. We like the technology. The businesses they have are leaders in the spaces they’re in.”
Krenicki said he spends as much as 6 percent of GE Energy Infrastructure sales on product development, and will apply that to Dresser. About 85 percent of Dresser and GE Energy Infrastructure’s customers are common, he said. More than 40 percent of Dresser’s revenue is from services.
Solomon Dresser founded what would become Dresser Inc. in 1880 after patenting a packer used to isolate oil below the ground, according to the company’s website. Halliburton Co. acquired Dresser in 1998 and divested it in 2001, the year after Dick Cheney stepped down as Halliburton CEO to become U.S. vice president.
GE rose 39 cents, or 2.4 percent, to $16.90 at 4:15 p.m. in New York Stock Exchange composite trading, the highest closing price since May 19. The shares have gained 12 percent this year.
Immelt said this year he wants to expand the GE Energy Infrastructure segment, also the world’s biggest provider of power-generation equipment. GE Oil & Gas, a division of the $37 billion Energy Infrastructure business, is expanding as global demand increases and more sophisticated equipment and methods are needed to extract fossil fuels.
The division makes turbines that drive compressors and compressor trains, exploration equipment, condensers, metering systems and other machinery for the oil and natural-gas industries. GE had $157 billion in revenue last year.
“We’ve always talked about diversity” in the division, Krenicki said. “The fact that we did the Dresser deal shows that we have lots of options, lots of choices and lots of room to grow and play offense.”
The division is investing in acquisitions as well as growth from its existing assets, he said.
Barclays Capital advised GE in the transaction. Morgan Stanley advised Dresser.
GE said earlier today that Wellstream Holdings Plc, a U.K.- based provider of oil-field services provider focused on Brazil, rejected a 755 million-pound ($1.2 billion) takeover offer. Last week, GE Energy bought the waste-heat power generation business of closely held Calnetix Inc. for an undisclosed sum, adding to its Jenbacher biogas unit.
Krenicki declined to comment further on Wellstream.
In addition, GE Capital said today that it bought retailer finance loans from Citigroup Inc., adding $1.6 billion in U.S.- based assets in GE Capital’s first consumer purchase since the financial crisis took hold in 2008.