National Oilwell Varco's Acquisition Is A Nice Addition

 |  About: National Oilwell Varco, Inc. (NOV), Includes: RBN
by: The Value Investor

National Oilwell Varco (NOV) announced on Thursday that it will acquire its smaller competitor Robbins & Myers (RBN) in a deal valuing the firm at $2.5 billion.

The Deal

National Oilwell announced that it will acquire Robbins & Myers in an all cash transaction valuing the firm at $60 per share. In a reaction to the offer, shares of Robbins & Myers ended the day 27.4% higher at $59.63. Shares of the supplier of engineered equipment for the global energy market trade just 0.6% below the offer price, at a new all time high.

Robbins & Myers reported annual revenues of $821 million in 2011 with 3,400 employees in 15 countries. The company reported a net income of $134 million that year. In its latest quarterly filing, the company reported a net cash position of $147 million. The deal values Robbins & Myers at roughly 2.8 times annual revenues and 17 times annual earnings, excluding the cash position.

The deal is subject to the normal closing conditions, including the approval of two-third of Robbins & Myers' shareholders. The boards of both companies unanimously approved the deal which is expected to close in the fourth quarter of this year.

CEO and Chairman Pete Miller of National Oilwell Varco commented on the acquisition:

"Robbins & Myers has many complementary products with those National Oilwell Varco currently offers the industry. I am particularly enthusiastic about the prospect of incorporating their downhole tools, pumps and valves into National Oilwell Varco Petroleum Services & Supplies and Distribution & Transmission segments."


On the 26th of July, National Oilwell Varco announced its second quarter results. The company reported net income of $605 million, or $1.42 per fully diluted share. Second quarter revenues came in at $4.7 billion.

The company reported $1.9 billion in cash and equivalents and operates with roughly $1.4 billion in short and long term debt for a net cash position of around $500 million. For the first six months of 2012 the company generated $9.0 billion in revenues, putting the company on track to report revenues of $18 billion for the entire year. Net income came in at $1.2 billion, placing the company on track to report annual net income of $2.5 billion, or around $6 per share. Based on the current $33 billion valuation, the firm is valued at 1.8 times revenues and 13 times earnings.

This valuation compares to a revenue multiple of 1.1 times for competitor Baker Hughes (BHI) and 2.5 times for Schlumberger (SLB). Both competitors trade at 12 and 18 times annual trailing earnings, respectively.

Currently, National Oilwell pays a quarterly dividend of $0.12 per share for an annual dividend yield of 0.6%.

Investment Thesis

National Oilwell Varco's shares have returned 13% so far this year. Shares have benefited from reasonable strength in the energy sector despite a correction in oil and gas prices. The company still had an incredible $11.3 billion in backlog orders for its Rig Technology segment.

Over the past decade, shareholders have seen their holdings increased by a factor 7 to trade around $77 at the moment. Shares remain within sight of all time highs around $85 per share. In 2008, 2011 and earlier this year, shares of National Oilwell bounced back from this resistance level. In the meantime, the valuation increasingly becomes more appealing as the company is on track to report record annual revenues and profits for the current year.

The acquisition of Robbins & Myers is a nice addition to National Oilwell's business. Earnings and revenues will be increased by approximately 5%. While the company pays a 28% premium for the business, the valuation seems fair, given the opportunities for strategic and cost synergies to be achieved.

Investors in National Oilwell Varco reacted modestly favorably to the announcement of the deal as shares closed up 0.8% on Thursday. Investors think the company got a fair deal that will be accretive in the medium to long term.

With energy pries rebounding recently, shares could make a run for new all time highs.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.