General Electric’s shareholders are closing the gusher on bolt-on oil deals. Their reaction to the conglomerate’s $3 billion purchase of Lufkin Industries is more realistic than the wowed reception given to an earlier acquisition. Lufkin, whose technology helps increase production for aging oil wells, is a strong player in a growing sector. But previous deals did little for margins and the latest doesn’t come cheap.
Just two-and-a-half years ago, shareholders greeted G.E.’s $3 billion purchase of Dresser, a maker of gas infrastructure, by adding $4 billion to the buyer’s market capitalization. By contrast, Monday’s deal was initially followed by a 0.2 percent drop in the stock before it rebounded later in the day.
G.E. is certainly not driving a hard bargain. The enterprise value the company is paying comes in at 13.5 times this year’s estimated earnings before interest, taxes, depreciation and amortizaion, or Ebitda. That’s far more than the 8.7 multiple National Oilwell Varco paid last year for Robbins & Myers, according to Credit Suisse. And G.E. is also stumping up a 38 percent premium.
That puts the acquisition squarely in the camp of some of its previous deals. It shelled out a 29 percent premium for Wellpoint of Britain in 2010, for example. And these earlier deals for G.E.’s oil and gas unit, though hardly failures, have not been roaring successes.
Granted, the business now brings in $15 billion of revenue a year, three times its 2005 showing. And it now accounts for 10 percent of the conglomerate’s top line. But the oil and gas division’s operating margin has slipped from 15 percent to under 13 percent in the past couple of years. That implies the company has not managed to find extra synergies to justify the $11 billion or so it has spent buying five companies since 2007.
Lufkin ought to be different. It has nearly doubled earnings over the past two years and is one of the top three players in its field. But after experiencing several years of decent, but not stellar, returns from its spending spree, G.E. shareholders are right to temper their earlier optimism.
Christopher Swann is a columnist for Reuters Breakingviews. For more independent commentary and analysis, visit breakingviews.com.
