A Sure Bet: Dresser-Rand Group To Be Acquired By Siemens Energy

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Includes: DRC, SIEGY
by: Maudes Capital

Summary

The deal pays $0.50 per month, investors do not realize that and you can always make good use of it.

Shareholders approved the merger.

Siemens is big and a serious buyer with very good reputation. The deal is a sure bet.

Introduction

On Sep 21, 2014, Siemens Energy, Inc. (OTCPK:SIEGY) ("Siemens") and Dresser-Rand Group Inc. (NYSE:DRC) ("Dresser"), a global supplier of rotating equipment and aftermarket parts, announced the signing of a merger agreement under which Siemens will acquire Dresser. Under the terms and conditions of the agreement, Dresser-Rand shareholders will receive a cash amount of $83.00 plus $0.55 per month if the closing of the merger occurs on or after Mar 1,2015.

The most interesting feature of the merger is the $0.55 payment per month. Many investors have not analyzed this and are getting a lower final payment than the real return. In addition, the acquisition makes a lot of sense for both groups. The synergies are important and the industry is consolidating due to the decline in oil prices.

Deal Details

In order to make a quick review of the terms and conditions of the transaction, I have prepared the following table, including: the type of buyer and the type of target with links to find information about them, the conditions and the potential profit.

Transaction: Dresser-Rand Group Inc. To Be Acquired By Siemens Energy, Inc.

Buyer

Nationality: Germany

Private/Public: Public

Market cap/AUM: $76.62 B

Strategic/Financial: Strategic
Hostile: No

Website

Yahoo Finance

Edgar

Target

Nationality: U.S.
Price: $83.00 in cash + $0.55 per month

Market cap: $7.6 B
Sector: Diversified Machinery

Website
Yahoo Finance
Edgar

Conditions

Cash/stock: cash

Premium: 37.4%

Termination fee: Parent 5.2% / Company 2.6%

Merger approval: passed

Antitrust: HSR Act, CFIUS , Foreign Regulatory Clearances (Brazil, Canada, China … )

Financing condition: No

Special conditions: No
Go-shop: No

No solicitation of transactions: Yes

Press release / SEC Filing

12/8/2014 Spread: 2.9 %

12/8/2014 Annualized Spread: 11.6 %

Expected termination date: Summer of 2015

Spread Calculation

The press release reads:

"At the effective time of the merger, Dresser-Rand stockholders will receive, for each share of common stock they own, cash in the amount of (NYSE:I) $83.00, plus (ii) if the closing of the merger occurs on or after March 1, 2015, $0.55 per month beginning March 2015 to and including the month in which the closing occurs."

The merger is expected to close in the summer of 2015. We discuss two scenarios (there are many) considering two different closing times:

If the merger closes before Mar 1, 2015, for example on Feb. 27, 2015, the spread is the following:

Cash consideration amount = $83.00 in cash per share

The spread is:

((26.71/80.66)-1)*100 = 2.9%

Assuming that the transaction will last 3 months (which is unlikely), the calculation of the analyzed spread is:

2.9% * 12/3 = 11.6%

If the merger closes after Mar 1, 2015, for example on Jul 5, 2015, the spread is the following:

Cash consideration amount = $83.00 in cash per share

Monthly payment = $0.5 * 5 months = $2.5 in cash per share

Total Payment = $85.5 in cash per share

The spread is:

((85.5/80.66)-1)*100 = 6.00%

Assuming that the transaction will last 8 months, the calculation of the analyzed spread is:

2.9% * 12/8 = 4.35%

How do we explain the spread?

The spread is very large because of the recent decrease in oil prices. In addition, the regulation involved in this deal is very important. The merger agreement reads:

"Foreign Regulatory Clearances. The parties must also file merger notifications with the appropriate regulators in Brazil, Canada, China, Colombia, the European Union, Mexico, Russia, South Africa and South Korea (together with any other jurisdictions mutually agreed by the parties to be required, the "required foreign jurisdictions") pursuant to each jurisdiction's respective antitrust or competition laws. The parties must also observe mandatory waiting periods and/or obtain the necessary approvals, clearances or consents in each of the required foreign jurisdictions before completing the merger"

The following explains a little more about the regulatory approvals:

"Although we expect that all required regulatory clearances and approvals will be obtained, we cannot assure you that these regulatory clearances and approvals will be timely obtained or obtained at all or that the granting of these regulatory clearances and approvals will not involve the imposition of additional conditions on the completion of the merger, including the requirement to divest assets, or require changes to the terms of the merger agreement. These conditions or changes could result in the conditions to the merger not being satisfied."

This factor is making investors afraid of the deal. This is, in my opinion, the most important risk of the deal. Finally, the transaction period will be very long and investors surely take this into account.

In contrast, we think that the spread is too big. The market discounts too much risk in this transaction. Firstly, Dresser shareholders approved the deal last month. Secondly, the CEO explained that Siemens will not walk away from the deal:

"If we walked away from that deal we would see a lot of happy competitors. That is why we do not even think about walking away. We are in this for the long haul," Kaeser said at an investor conference on Tuesday"

Therefore, the 4.35% analyzed is not logical. Siemens is big and a serious buyer with very good reputation. The deal is a sure bet.

Investment idea and conclusion

This deal is very interesting. The only problems we see are the regulatory approvals and the timing. The spread is too big for the risk of the transaction. The CEO is very happy with the transaction and will not walk away and the shareholders approved the merger. You should buy DRC if you are looking for a conservative investment.

Finally, the fact that the deal pays $0.50 per month is very interesting. Many investors do not realize that and you can always make good use of it.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.

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