Dresser-Rand Seen Luring Suitors Like Siemens: Real M&A
Dresser-Rand Group Inc. (DRC), with one of the best sales outlooks among makers of oilfield equipment, is turning into a takeover candidate for buyers such as Siemens AG (SIE), National Oilwell Varco Inc. and Cameron (CAM) International Corp.
Higher oil prices and growing global energy needs are driving greater demand for Dresser-Rand’s equipment. The Houston-based maker of compressors and turbines used to extract, move and process oil and gas is projected to increase revenue by 58 percent in the next three years, faster than 86 percent of U.S. peers, according to data compiled by Bloomberg.
Siemens is a logical buyer as it seeks to keep up with General Electric Co. (GE), which agreed to purchase Dresser-Rand rival Lufkin Industries Inc. for about $3.3 billion in April, Eagle Asset Management Inc. said. Siemens has evaluated Dresser- Rand as a takeover candidate for as many as two years, according to three people familiar with the situation. National Oilwell Varco (NOV) may also be interested, said Capital One Financial Corp. JPMorgan Chase & Co. sees Cameron as a potential suitor, while William Blair & Co. said GE could even be lured by the $4.6 billion company.
“It’s without a doubt an acquisition target,” J. David Anderson, an analyst at JPMorgan in New York, said in a telephone interview. “This is a great little company that really should not be a stand-alone company,” said Anderson, who has followed Dresser-Rand since its initial public offering in 2005. “It probably should be within a more diversified capital- equipment company or an investor conglomerate.”
Blaise Derrico, vice president of investor relations at Dresser-Rand, didn’t respond to phone or e-mail messages requesting a comment on the company’s takeover prospects. Representatives of Siemens, GE and Cameron declined to comment. National Oilwell Varco Chief Operating Officer Clay Williams didn’t return requests for comment.
Today, shares of Dresser-Rand rose 6.6 percent, the most in 20 months, to $60.35. The gain was also the second-biggest among 73 stocks in the Russell 1000 Energy Index.
Dresser-Rand makes compressors, turbines, rotators and other equipment for oil and natural-gas producers. GE’s decision to buy Lufkin this year at the highest multiple to profit on record signaled an appetite for takeovers in the industry, and Dresser-Rand could be next on the shopping list, said Eric Mintz of St. Petersburg, Florida-based Eagle Asset Management.
“The number of takeout candidates in this energy infrastructure space is rapidly diminishing,” Mintz, a fund manager who helps oversee more than $9 billion, including Dresser-Rand shares, said in a phone interview. Dresser-Rand would be among “the remaining very logical bolt-on acquisitions for somebody.”
Dresser-Rand offers buyers one of the industry’s fastest growth rates through sales of new equipment and providing maintenance for already installed products. The company, with a history that stretches back to 1840, is poised to boost revenue by 58 percent from 2012 to $4.3 billion in 2015, a faster pace than 86 percent of U.S. oil and gas services companies valued at more than $1 billion, data compiled by Bloomberg show.
That expansion is being fueled by customers boosting capital spending for exploration and production, with worldwide expenditures projected to climb 5.5 percent this year to a record $645 billion, James Crandell, an analyst at Cowen Group Inc. in New York, wrote in January in a note to investors.
Given the industry boom, industrial conglomerates are looking to increase their presence in the oilfield-equipment group, JPMorgan’s Anderson said.
For interested buyers, Dresser-Rand offers the largest installed base of compressors in the energy industry, said Robin Shoemaker, a New York-based analyst at Citigroup Inc. The business that services existing equipment produces a long-term, reliable stream of cash, according to Joseph Gibney, an analyst at Capital One.
Siemens, based in Munich, is a logical buyer for Dresser- Rand as Europe’s largest engineering company vies with stiffer competition from GE in the energy equipment market, said Mintz of Eagle Asset.
“From an M&A perspective, oil and gas is an attractive environment for us,” Siemens Chief Executive Officer Peter Loescher said in a May 2 interview with Anna Edwards on Bloomberg Television’s “Countdown.”
Siemens has been looking at Dresser-Rand as a possible acquisition target on and off again for as many as two years, according to three people familiar with the situation. The engineering firm has been working with investment bank Lazard Ltd. to examine the feasibility of a takeover, said two of the people, who asked not to be identified because talks are private.
Judi Mackey, a spokeswoman for Lazard, declined to comment.
While Siemens is interested in adding Dresser-Rand’s equipment for oil and natural-gas producers, the company is concerned about the high valuation of the target, making a takeover agreement unlikely, one of the people said.
Dresser-Rand’s turbines are used in floating production storage and offloading, or FPSO, vessels, which are deployed when pipelines from shore cannot reach. The equipment needed for the vessels, which can span the length of three American football fields and cost as much as $1 billion each, has been an area of growth for National Oilwell Varco, the largest U.S. maker of oilfield gear.
National Oilwell Varco’s push to sell more FPSO equipment makes the Houston-based company a “logical strategic candidate” to buy Dresser-Rand, said Gibney.
“It’s a home run” for National Oilwell Varco, Gibney said in a phone interview. “It checks the box on everything Varco looks for in an acquisition. The revenue mix is split pretty evenly between new units and after-market. It’s a real after- market-driven profitability model.”
Cameron, based in Houston, also makes sense as a potential buyer because both companies have relatively little overlap in what equipment they make while sharing exposure to the industry’s three broad categories of production, pipelines and refineries, Anderson of JPMorgan said.
Even after its deal for Lufkin, Fairfield, Connecticut- based GE could be interested in buying Dresser-Rand to further expand its energy equipment assets, according to Nick Heymann, a New York-based analyst at William Blair.
A takeover of Dresser-Rand is “certainly a possibility,” Heymann said in a phone interview. “Their interest in that space is very tangible and one that they have had certainly good success building out a strong presence in.”
The biggest obstacle to any deal getting done is the price that Dresser-Rand CEO Vincent Volpe Jr. will probably require, according to JPMorgan’s Anderson.
“Vince has a pretty big number in his head,” the analyst said. “He sees a tremendous amount of earnings growth in the next two to three years. He doesn’t want to sell himself short.”
Mintz of Eagle Asset estimated that Dresser-Rand could fetch about $100 a share in a sale, or 77 percent more than yesterday’s closing price of $56.63. A deal at that price, which would value the company at $7.6 billion, would represent the biggest premium on record among oilfield machinery and equipment deals exceeding $1 billion, data compiled by Bloomberg show.
Still, Dresser-Rand is a digestible target for large industrial companies, said Shoemaker of Citigroup. Among potential buyers of the company, GE has a market capitalization of $235 billion while Siemens and National Oilwell Varco are valued at $93 billion and $29 billion, respectively.
“Some industrial companies are looking to get more involved in energy, particularly in the manufacturing of oilfield equipment,” Shoemaker said in a phone interview. “It’s pretty clear that Dresser-Rand is the No. 1 company in its market niche of high-end compressors and turbines.”