General Electric Co. agreed to buy Lufkin Industries Inc. for about $3.3 billion to add technologies for the oil and gas industry as Chief Executive Officer Jeffrey Immelt raises his bet on energy.
Lufkin shareholders will receive $88.50 per share in cash, and the deal should close in the second half, GE said in a statement today. The price is 38 percent more than the $63.93 close on April 5 for the Lufkin, Texas-based manufacturer.
Oil and gas is GE’s fastest-growing segment, with sales up 57 percent to $15.2 billion since 2009, and Immelt accelerated that expansion with $11 billion of purchases during a six-month period ended in 2011. Lufkin provides so-called artificial lift, which helps bring hydrocarbons to the surface in low-pressure reservoirs and boosts efficiency in naturally flowing wells.
“As high as 94 percent of existing oil wells are going to require some form of artificial lift,” Daniel Heintzelman, CEO of GE Oil & Gas, said in a telephone interview. “This gives us more of a chance to become a comprehensive player in this space.”
GE said it’s paying about 13.5 times estimated 2013 earnings before interest, taxes, depreciation and amortization. Last year, Lufkin posted sales of $1.3 billion.
Bloomberg News reported in September that Lufkin was shaping up as a deal target after the company fell to its lowest valuation in almost three years as new drilling techniques fuel a boom in shale-oil production.
The proposed takeover is among the three largest of an oilfield machinery and equipment company over the past decade, according to data compiled by Bloomberg. The median that buyers paid in a survey of more than 30 comparable deals over that period, excluding Lufkin, was about 11.5 times earnings before interest, taxes, depreciation and amortization on a trailing 12- month basis.
“The fit is solid,” New York-based Sanford C. Bernstein analyst Steven Winoker, who holds a market perform rating on GE, wrote in an e-mail. “The price seems very high considering the challenges and expectations in North America drilling.”
With about 4,500 employees in more than 40 countries, Lufkin manufactures artificial lift equipment through a global network of more than 110 service centers and nine manufacturing facilities.
GE will more broadly market Lufkin’s products including beam pumps, often known as nodding donkeys, that are ubiquitous on oilfields, Heintzelman said in the interview.
The company expects $60 million of cost savings from the acquisition over five years, mainly by shutting Lufkin’s corporate headquarters and consolidating purchasing, he said. Field staff would be kept because the “industry is under terrible pressure for talent,” Heintzelman said.
Simmons & Co. provided financial advice to Lufkin, while Bracewell & Giuliani served as legal adviser. Goldman Sachs Group Inc. and Deutsche Bank AG acted as financial advisers to GE, with Weil Gotshal & Manges LLP offering legal guidance.
GE rose 0.3 percent to $23 at 8:39 a.m. in New York before the start of regular trading. The shares gained 9.2 percent this year through April 5 compared with an 8.9 percent increase for the Standard & Poor’s 500 Index and a 10 percent advance for Lufkin.
The acquisition announcement followed Fairfield, Connecticut-based GE’s plans to invest $110 million in a research lab in Oklahoma City to study ways to improve extraction of hard-to-reach oil and gas deposits, including hydraulic fracturing and horizontal drilling.
That facility will hire as many as 125 engineers and scientists in the coming months and will eventually expand its research to more conventional drilling techniques, Chief Technology Officer Mark Little said in a telephone interview.
General Electric was advised by Goldman Sachs, Deutsche Bank and the law firm Weil, Gotshal & Manges. Lufkin was advised by Simmons & Company and the law firm Bracewell & Giuliani.