General Electric Co is buying oilfield pump maker Lufkin Industries Inc for $2.98 billion, sharply increasing its presence in the fast-growing market to extract oil and natural gas from shale rock, the conglomerate said on Monday.
Lufkin's pumps, also known as artificial lift products, are commonly seen seesawing back and forth on top of energy wells to pull oil and natural gas to the surface.
The deal, which the parties expect to close by June, is GE's first major acquisition since the conglomerate sold its remaining stake in NBC Universal two months ago and will nearly double revenues of the company's Oil & Gas unit. CEO Jeff Immelt has spoken openly of GE's plans to focus more on growth in the energy-rich shale fields of North Dakota, Texas and elsewhere in the United States.
GE Oil & Gas will become the company's third-largest manufacturing unit by revenue behind the power and water and aviation units. It has been growing at a breakneck clip, posting a 16 percent jump in revenue from 2011 to 2012.
The unit posted 2012 revenue of $1.92 billion, and Lufkin had 2012 revenue of about $1.3 billion.
Immelt said last fall that GE would seek acquisitions in the $1 billion to $3 billion range. Natural gas development is "the place to play both in terms of the U.S. and the rest of the world," he told analysts at the time.
Lufkin, named for its hometown in Texas, was founded in 1902 to make railroad equipment. The company expanded into oil pumps in 1925 and stayed private until launching an initial public offering in 1990.
GE has spent about $11 billion in acquisitions since 2007 to boost its presence in the oil and gas business, which is its fastest-growing and accounts for about 10 percent of its revenue.
"There's certainly a big premium here for Lufkin, but I don't think they overpaid," said Oliver Pursche, president of Gary Goldberg Financial Services in Suffern, New York, which owns GE shares.
"I think you're going to see a significant increase in M&A activity by a lot of similar firms, because that's the only way they're going to grow" in the oil and natural gas industry, he said.
The Lufkin deal is a positive use for GE's $125.7 billion cash pile at a time of cheap interest rates, Pursche said.
GE's energy business also makes underground pumps that pull oil and gas to the surface, as well as wellheads, compressors and filters.
"This (Lufkin) deal is really going to round out our portfolio," Daniel Heintzelman, head of GE Oil & Gas, said in an interview. Heintzelman, who joined GE in 1979, is a member of the company's corporate executive council and previously worked with GE's aircraft engine business.
GE expects the oil pump market to grow at 12 percent to 13 percent per year for at least the next decade, said Heintzelman, citing statistics that at least 94 percent of oil wells will need pumps or lifts at least once in their lifetime.
Lufkin has "a great brand in the marketplace, and we hope to build on that," Heintzelman said.
GE has not decided whether it will keep the Lufkin brand name or retain the company's executives, but it is inclined to keep staff members, Heintzelman said.
"Talent in this industry, people in this industry, are crucial," he said.
Lufkin's fourth-quarter profit beat analysts' estimates on demand for its pumping equipment from companies operating in energy-rich shale fields such as North Dakota's Bakken and the Eagle Ford in Texas, despite a slowdown in overall drilling activity.
However, the company estimated that a slow recovery in the stalled U.S. onshore drilling would dent profits this quarter.
Lufkin primarily operates in North America, and GE plans to export the company's pumps and other technology to energy fields all over the world, Heintzelman said.
The offer is higher than Lufkin's intrinsic value of $70.98 per share as measured by Thomson Reuters StarMine.
The StarMine model is a measure of a stock's current value when considering analysts' growth estimates for five years, and then modeling the typical growth trajectory over a longer period of time.
The deal values Lufkin at $88.50 per share, a premium of more than 38 percent to the stock's Friday close. Lufkin shares rose 37.5 percent to $87.90 in afternoon trading, while GE were up 0.5 percent to $23.04.
Simmons & Co advised Lufkin, while Goldman Sachs and Deutsche Bank advised GE.
(Reporting by Ernest Scheyder in New York and A. Ananthalakshmi and Garima Goel in Bangalore; Editing by Sriraj Kalluvila, Lisa Von Ahn and Leslie Gevirtz)