General Electric Co. agreed to buy most of Converteam from Barclays Private Equity Ltd. and LBO France for $3.2 billion to add equipment that helps electricity flow to the power grid from devices such as wind turbines.
The transaction covers 90 percent of Massy, France-based Converteam and should close in the third quarter, GE said today in a statement. Converteam’s senior management will retain a 10 percent stake that GE said it will acquire over two to five years at a price that shouldn’t exceed about $480 million.
Buying the closely held company brings Chief Executive Officer Jeffrey Immelt’s spending on energy acquisitions to more than $11 billion since October as he targets oil and gas exploration, renewables like wind and solar, and rising demand for steady power in emerging markets such as Brazil and China.
Converteam had $1.5 billion in sales and $239 million in earnings before interest, taxes, depreciation and amortization last year, GE said. The price is about 15 times Converteam’s Ebitda, lower than the median multiple of 21 times Ebitda in 32 acquisitions of power-conversion equipment companies worldwide in the past five years, according to Bloomberg data.
“We’ve picked up a great asset,” said John Krenicki, CEO of GE Energy Infrastructure, which will run Converteam through a separate unit inside the group of energy businesses. “We’ve been hunting this for a long time.”
Orders at Converteam rose 36 percent in 2010, according to Fairfield, Connecticut-based GE. The company, whose products include motors used in gas pipelines and equipment to convert electricity from wind, thermal and hydro sources into “grid-quality” power, has 5,300 employees. It will add to GE earnings “immediately” within the first year, Krenicki said.
Some of Converteam’s operations are on the same grounds as GE’s natural gas turbine operations in Balfort, France, fostering a relationship that facilitated the purchase, he said. GE has about 10,000 employees in France, which also benefited the relationship.
The acquisition should produce $250 million in benefits annually within five years, according to GE’s statement. Much of that will come from savings on materials and manufacturing in areas where both companies have customers, Krenicki said.
The deal also gives GE expansion in the growing mining and marine industries, he said.
The so-called energy efficiency, electrification and automation industry is a $30 billion market that’s growing faster than the global economy, GE said. About 25 percent of the world’s electricity is used to power motors, and Converteam’s products reduce consumption by one-third, GE said.
GE is the world’s biggest maker of power-generation equipment, and its Energy Infrastructure division provided $37.5 billion of the parent company’s $150 billion in sales last year.
“We welcome deals in the Energy Infrastructure unit as historically, deals have been well-executed here,” Julian Mitchell, a New York-based analyst with Credit Suisse AG who rates GE shares ‘outperform,’ wrote in a note to clients today. “GE should focus on this business, given its growth opportunities and existing strong platforms.”
Buying Converteam gives GE products to compete with Switzerland’s ABB Ltd. and Germany’s Siemens AG as the world’s electricity grids are upgraded and expanded to accommodate rising power demand.
Any decline in the nuclear industry following radiation leaks at a Japanese nuclear power plant damaged during this month’s earthquake and tsunami may prompt companies such as GE to consider broadening their product range, analysts said earlier this month.
GE’s nuclear venture with Hitachi Ltd. yields sales of about $1 billion a year for the company.
“What I think it’s going to confirm is diversification,” Krenicki said. “We’re in the nuclear business. We’re committed to the nuclear business. But we’re a big player in natural gas, we’re a big player in renewable energy. And the power portfolio, if you look at the acquisitions we’ve done in the last six months, they have a real natural-gas bent to them.”
GE is continuing to put the “full-force” of its employees and engineering teams into supporting Tokyo Electric Power Co., which runs the damaged Fukushima Dai-Ichi plant, said Krenicki, who called the situation in Japan “tragic.” The facility’s reactors are based on a four-decade old design from GE.
Power Conversion Equipment
Converteam was the power conversion unit of Alstom SA, which sold it to Barclays Private Equity amid a November 2005 state bailout led by then-Finance Minister Nicolas Sarkozy. Buyout firm LBO France acquired a third of the company in July 2008. The deal is the second-largest among power-conversion equipment companies since March 2006, according to Bloomberg analysis of purchases whose financial terms were disclosed.
“We view this deal as consistent with GE’s strategy of building out its infrastructure capability as well as re-engaging with industrial end markets and so will be viewed positively by investors,” said Nigel Coe, a Deutsche Bank AG analyst in New York who has a “hold” rating on the shares.
Last month, GE agreed to buy the well-support division of John Wood Group Plc for about $2.8 billion, adding equipment that helps extract more oil and gas from mature fields. GE had already invested about $5 billion on energy-related acquisitions, including Lineage Power and Dresser Inc., both of which have technologies that fit across GE’s equipment and service product lines.
Krenicki, who said GE Energy Infrastructure will now concentrate on integrating its acquisitions, didn’t rule out further small purchases.
He also said the company may consider building a separate unit under the GE Energy banner that would target mining or metals, similar to the way GE assembled its oil and gas division in the past five years, because of Converteam’s products.
“There’s no reason we can’t have a GE Mining or a GE Metal similar to what we’ve done in oil and gas,” Krenicki said.
GE rose 11 cents to $19.86 at 4:15 p.m. in New York Stock Exchange composite trading. The shares have climbed 8.6 percent this year so far compared with a 4.9 percent gain in the Standard & Poor’s 500 Index.
Immelt is investing some of the cash GE hoarded during the financial crisis. He raised the dividend twice in 2010, is resuming stock buybacks and spending on acquisitions as he bulks up non-financial businesses, especially in infrastructure units such as energy, health care and aviation. GE ended 2010 with $79 billion in cash, $19 billion at the parent company’s level.
GE was advised by Goldman Sachs Group Inc. and Bank of America Corp. as well as the law firm of Allen & Overy.