On April 8, General Electric Company (NYSE:GE) announced the acquisition of Lufkin Industries, Inc. (NASDAQ:LUFK) Lufkin Industries, Inc. (NASDAQ:LUFK) is a provider of artificial lift technologies for the oil and gas industry and a manufacturer of industrial gears. The deal was sealed at $3.3 billion which represents a FY2013 x13.5 EBITDA. According to General Electric, the artificial lift technology is used in 94% of the one million oil-producing wells around the well helping lifting hydrocarbons in low pressure wells. The global artificial lift sector is expected to reach $13 billion in 2013 (according to Spears & Associates). Let’s see some of the positive and negative characteristics this deal will have on General Electric.
It Will Increase General Electric’s Market Share in the Artificial Lift Segment
This deal is in line with General Electric Company (NYSE:GE)’s M&A strategy of deals between one and four billion focused on the oil & gas sector. Lufkin is a global leader in the artificial lift industry with a market share of 31% in the rod lift sector and 46% of the electric submersible pump (ESP). This deal will boost General Electric’s market share of 5% of the artificial lift market to 15% after the deal. Although the price paid seems a bit expensive compared to other industrial transactions, the premium is due to Lufkin’s competitive advantages and solid market share position.
After the deal General Electric Company (NYSE:GE) can compete with Weatherford International Ltd (NYSE:WFT) which currently holds 24% of the artificial lift market share. It could also benefit from Weatherford International Ltd (NYSE:WFT)’s situation in the past two years, which included issues with tax accounting, increasing debt, no free cash flow generation and credibility issues. The company has spent more than $125 million in the Foreign Corrupt Practices Act issue on probes linked to reports of violations regarding exports and bribery in Europe, Iraq and West Africa.
Lufkin Positive Aspects
Lufkin has had a very impressive growth rate. It increased revenues in 2012 to $1.3 billion, a 37% increase from the previous year. Also, it has increased net earnings to $81.9 million with a 24% increase from 2011. This is reflected on its share price, which has gained an outstanding 163.8% in the last five years. Investors should consider that some of this growth was given by acquisitions. Lufkin acquired thee companies in 2012. Two of them: Datac Instrumentation and Realflex Technologies provided Lufkin with state-of-the-art software and well management systems.
Its strategy is focused on extending its global reach: with new markets being addressed such as the new manufacturing and aftermarket facility in Ploiest, Romania or other platforms including Eastern Europe, Middle East, North Africa and Latin America, specifically Colombia and Argentina.
The company has also developed new US service centers (Bakken and Eagle Ford) as shale plays in US are gaining momentum and expanded its product portfolio with the aforementioned acquisitions in 2012.