General Electric to buy Lufkin for $3.3bn

General Electric Market Cap(as of 19/04/13)  : $253.73bn

Lufkin Industries Market Cap(as of 19/04/13): $2.97bn

Deal size: $3.3bn, all cash

General Electric Oil and Gas, a division of General Electric Corp., agreed to acquire Lufkin Industries, a manufacture of specialist pumps based in Texas, taking a further step to grow and consolidate its business through acquisitions. GE offered $3.3bn in cash, which represents a price of  $88.50 a share and a multiple of 13.5 times Lufkin’s estimated EBITDA.

In the recent years GE has done deals worth $11bn to develop its oil and gas services business, relying on its global presence and technological expertise to add value to its target companies. Lufkin is a maker of lift equipment for oil and gas platforms and it makes the artificial lift technology used in 94 percent of oil-producing wells around the world. Lufkin is further specialized in rod lifts, particularly apt for shale gas and representing an increasing share in that market, growing from 19% to 31% year on year. The company reported $81.9 ml in net income and $1.3bn revenue last year, recording its third consecutive year of growth. By adding Lufkin to its oil and gas businesses, GE will be able to complement the electric submersible pumps, used down oil wells, that it acquired from Wood Group in 2011. GE would be able also to benefit from synergies coming from cost savings in its supply chain and from a market expansion for Lufkin’s products.

However, comparisons between this transaction and other similar recent deals suggest that GE is actually paying a “premium” price for Lufkin. For instance, National Oilwell Varco offered last August $2.5bn for Robbins & Myers, a manufacturer of oilfield equipment, and in 2011 Dover Corporation agreed to pay $402.5mln for Harbison Fischer, another manufacturer of rod pumps; both prices were only 8-9 times the targets’ forecasted EBITDA.

After the announcement Lufkin shares recorded a 37.6% rise in price closing at $87.96 and those in GE gained 0.8% to $23.12 in New York. The deal is expected to close in the second half of the year.

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.