General Electric Boosts Its Oil & Gas Business By Acquiring Lufkin

| About: General Electric (GE)

Shares of Lufkin Industries (NASDAQ:LUFK) are trading with gains of up to 38% in Monday's trading session. The global supplier to the oil and gas industry received a $3.3 billion offer from General Electric (NYSE:GE). Shares of GE hardly moved on the news.

The Deal

General Electric announced that the company will acquire Lufkin Industries, a leading provider of artificial lift technologies for the oil and gas industry. GE values the firm at $3.3 billion, or $88.50 per share in cash.

Lufkin, which employs 4,500 workers in over 40 countries will become part of GE's Oil & Gas division. The company operates more than 110 service centers and nine manufacturing facilities.

The deal will broaden GE's Oil & Gas division's artificial lift capabilities beyond electric submersible pumps to include rod lift, gas lift, plunger lift, hydraulic lift and progressive cavity pumps, among others.

GE's President of the oil and gas division Daniel C. Heintzelman commented on the deal:

"Advanced technologies, combined with new drilling practices, are revolutionizing the oil and gas industry. The artificial lift segment is at the heart of critical changes that are helping producers maximize well potential - which translates into increased output at lower operational cost. Lufkin's world-class people, equipment and services fit perfectly in our portfolio and will enable us to offer a wide range of artificial lift solutions to our customers in this fast-growing artificial lift sector."

The deal values the equity of Lufkin Industries at a little over $3.0 billion. GE will furthermore assume the $228 million net debt position of the firm, for a total deal value of roughly $3.3 billion.

For the year 2012, Lufkin generated annual revenues of $1.28 billion, on which it net earned $81.9 million. The deal values Lufkin at 2.6 times annual revenues and 40 times annual earnings. GE values the company at 13.5 times 2013's estimated EBITDA, and believes the deal will result in significant revenue and earnings synergies.

The deal has unanimously been approved by the board of directors of Lufkin. The deal is expected to close in the second half of 2013, and is subject to normal closing conditions and regulatory approval.


General Electric ended its fiscal year 2012 with $125.7 billion in cash and marketable securities. The company operates with $414.1 billion in short- and long-term debt, for a net debt position of roughly $290 billion. Note that most of the debt is attributable to GE's Capital business, which the company plans to shrink in size in the coming years.

For the year 2012, General Electric generated annual revenues of $147.4 billion, unchanged from the year before. The company net earned $13.6 billion for the year, down 4% on the year.

The market currently values General Electric at $238 billion. This values the firm at 1.5 times annual revenues and 17-18 times annual earnings.

The company pays a quarterly dividend of $0.19 per share at the moment, providing investors with a decent 3.3% dividend yield.

Some Historical Perspective

"What is good for GE is good for America" is a well-known phrase in the investment community. Shares peaked at a little over $40 in 2007 and fell to lows of $6 in 2009 during the recession. The financing division, GE Capital, almost bankrupted the company, but Warren Buffett came to the rescue.

From that point in time, the general economy recovered, and so did shares of General Electric. Shares steadily advanced to current levels around $23 per share. Over the past years, GE has reported stagnant revenues and earnings. The company has diverted its strategic focus away from the Capital business toward growing the industrial and oil and gas businesses.

Investment Thesis

Shareholders of GE hardly reacted to the deal, which is rather insignificant given the size of the industrial company. The $3.3 billion enterprise value is very small compared to GE's market capitalization and enterprise value.

Lufkin will become part of GE's Oil & Gas business, which reported annual revenues of $15.2 billion for 2012, on which it reported an operating profit of $1.92 billion. The deal will increase the revenues of GE's business unit by some 8%.

The multiples are a little higher than GE's overall valuation, given the 38% premium. However, it is likely to assume that GE's Oil & Gas business would trade at premium levels if they were being traded as an independent company. Also note that shares of Lufkin were trading around these levels as recently as February 2012. Additionally, GE will most likely be able to reap significant synergies following the deal.

Shareholders, although not necessarily applauding the deal, are applauding GE's strategy. The company will diversify away from the risky Capital business in order to grow its industrial operations, both organically and by acquisitions. The acquisition of Lufkin will boost its presence in the Oil & Gas business, while the company already strengthened its Aviation business by acquiring Italian Avio S.p.A. at the end of 2012.

This growth strategy is being accompanied by a sizable share repurchase program and a dividend hike, providing investors with a current yield of over 3%.

Overall, the addition of Lufkin Industries seems fair, as it underscores GE's strategy to grow the industrial businesses by making small to medium sized acquisitions. Shares are fairly valued at these levels, and should belong in any well-diversified portfolio.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.