GE to Acquire Lufkin for $3.3B

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In a concerted effort to augment its presence in the oil and gas industry, General Electric Company (GE) recently inked a definitive agreement to acquire artificial lift technology provider Lufkin Industries Inc. (LUFK) for $3.3 billion. The transaction, expected to close in the second half of 2013, would entail Lufkin shareholders to receive $88.50 in cash for each share they hold.

The acquisition will augment GE Oil & Gas’ portfolio and extend its global scale to better serve it customers than would otherwise have been possible as a standalone company. The transaction will enable GE Oil & Gas to expand its artificial lift capabilities in all categories barring electric submersible pumps, in which Lufkin currently does not operate. These include rod lift, gas lift, plunger lift, hydraulic lift, progressive cavity pumps and other state-of-the-art well automation and production optimization controls and software.

Artificial lift technology is utilized in oil-producing wells to bring hydrocarbons on the surface of reservoirs that do not have sufficient pressure to lift the fluids. It is currently used in about 94% of the 1 million oil-producing wells available globally to improve efficiency at low operational costs. The artificial lift technology has been the cynosure of advanced technologies and drilling processes that are revolutionizing the oil and gas industry in a world where demand for fossil fuels are increasing in leaps and bounds. According to Spears & Associates, a consulting firm catering to the global petroleum industry, the worldwide artificial lift sector is slated to reach $13 billion in 2013.

With a highly skilled workforce and world-class equipments, Lufkin is well poised to capitalize on this segment. The Texas-based company manufactures a wide array of industry-leading artificial lift equipment and operates in over 40 countries through 110 service centers and nine manufacturing facilities. In addition, the company has three turbomachinery production facilities and seven service centers to manufacture industrial gears and engineered bearings for energy-related industrial applications. The acquisition therefore brings on board unmatched revenue-generating potential for GE Oil & Gas.

The purchase price equates to a multiple of 13.5x 2013 estimated EBITDA (earnings before interest, taxes, depreciation and amortization). In 2012, Lufkin reported record revenues of $1.3 billion, representing year-over-year growth of 37%, primarily driven by a 47% rise in its artificial lift business. The acquisition is further expected to reap synergistic benefits for GE Oil & Gas and supplement its global platform of deep service offerings and network of research labs, thereby positioning it for significant top- and bottom-line growth.

Oil & Gas is the fastest-growing business segment of General Electric. Serving over 100 million customers worldwide. General Electric is one of the largest and the most diversified technology and financial service corporations in the world, with products and services ranging from aircraft engines, power generation, water processing, and security technology to medical imaging, business and consumer financing, media content and industrial products.

Its segments include Power & Water, Oil & Gas, Energy Management, Aviation, Healthcare, Transportation, Home & Business Solutions, and GE Capital. GE Oil & Gas provides highly developed technology equipment and services to onshore, offshore and sub-sea oil & gas projects. Its portfolio of turbomachinery equipment is used in mechanical-drive, compression and power-generation applications such as liquefying natural gas, moving hydrocarbons through pipelines or generating power via gas turbines at a production or industrial site.

General Electric currently has a Zacks Rank #3 (Hold). Other companies in the industry worth mentioning include Crane Co. (CR), and Honeywell International Inc. (HON), each carrying a Zacks Rank #2 (Buy).

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