General Electric To Buy Lufkin for $3.3 Billion in Ongoing Expansion into Oil and Gas

on Apr 9, 2013

America’s industrial giant General Electric (NYSE:GE) is pushing deeper into the oil and gas industry by agreeing a $3.3 billion (£2.1 billion) deal to acquire Texas-based pump manufacturer Lufkin Industries Inc (NASDAQ:LUFK). Lufkin’s share price jumped 38 percent on the NASDAQ, whereas GE’s shares closed marginally higher on the NYSE.

**GE to Buy Pumpmaker Lufkin**
On April 8, GE announced in a press release that it was going to acquire Lufkin, a leading provider of artificial lift technologies for the oil and gas industry and a manufacturer of industrial gears, for approximately $3.3 billion in cash. This means that the Lufkin shareholders will receive $88.50 per share. As The Times pointed out, the price represents a near-40 percent premium to the company’s closing price of $63.93 on Friday.

Lufkin’s share price jumped by 38 percent to $87.96 on the NASDAQ in the largest daily increase since November 1990, Bloomberg reported. GE’s share price, which has added 9.2 percent since the beginning of the year, closed 0.83 percent up at $23.12 on the NYSE.
GE said in its press release that the transaction, which was unanimously recommended by the Lufkin board of directors, is expected to close in the second half of 2013.

According to Bloomberg, in the purchase of Lufkin GE is tapping the proceeds from the February sale of its remaining 49 percent stake in NBC Universal to cable operator Comcast (NASDAQ:CMCSA, NASDAQ:CMCSK) for $16.7 billion, including $12 billion in cash.
**Sector Outlook**
Reuters quoted Oliver Pursche, president of Gary Goldberg Financial Services, which owns GE shares, as saying that there was “certainly a big premium here for Lufkin, but I don’t think they overpaid.” Pursche forecast “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.

Reuters also quoted Daniel Heintzelman, head of GE Oil & Gas, as expecting the oil pump market to grow at 12 percent to 13 percent per year for at least the next decade, citing statistics that at least 94 percent of oil wells would need pumps or lifts at least once in their lifetime.
Some observers seem less optimistic about the prospects for the oil and gas sector. The Times quoted Steven Winoker, a senior analyst at Sanford C. Bernstein, as writing in a note that the price paid for Lufkin “reflected a bet that the surge in oil drilling within North America will continue and/or shale oil development abroad will soon take off”.

“We’re sceptical on both fronts,” he pointed out, adding that growth in shale oil development in North America was likely to continue at a much reduced pace as compared with the previous three years.
**Expanding Into Oil and Gas**
!m[Lufkin’s Share Price Soars in New York](/uploads/story/1838/thumbs/pic1_inline.png)
GE also noted that its oil and gas segment was the company’s fastest-growing business, with $11 billion in acquisitions since 2007. Last week, the group announced plans to spend $110 million on building a global research centre for oil and gas technology in Oklahoma.
“Unconventional resources, and shale gas in particular, may be one of the biggest productivity drivers of our lifetime,” GE Chairman and CEO Jeff Immelt said in a company statement.
GE’s oil and gas business had revenues of $15.2 billion in 2012 compared with the group’s total revenues of $147.4 billion.
**GE’s share price closed 0.83 percent higher at $23.12 on the NYSE on April 8. Lufkin’s share price closed 37.59 percent up at $87.96 on the NASDAQ.**