General Electric a Decade Ahead of Siemens in Oil and Gas

NEW YORK (TheStreet) -- "Why now? Why wasn't a deal done earlier given that the strategic rationale has always been there?"

That was the question one analyst posed to Siemens (SIEGY) CEO Joe Kaeser as the German conglomerate announced its acquisition of energy equipment maker Dresser Rand (DRC) for $7.6 billion in cash. The acquisition is expected to give Siemens a bigger footprint in the North American oil and gas market and a brand that may carry resonance globally as nations in Asia, Africa, Europe and Latin America look to shale drilling onshore and new offshore drilling techniques to bolster their energy reserves.

General Electric (GE) , Siemens closest competitor globally, has spent the better part of a decade cutting deals for energy equipment manufacturers and generally at far lower prices. While Siemens is paying Dresser Rand an enterprise value of roughly 20-times the company's 2014 earnings before interest, taxes, depreciation and amortization (EBITDA), GE has made similar acquisitions at EV/EBITDA multiples in the high-single-digits or low-teens.

According to an analysis from JPMorgan analysts on Monday, GE paid an EV/EBITDA of 14 for Wood Group's support division, a multiple of 13 for Wellstream and a multiple  of 11 for Lufkin Industries and Cameron International's Reciprocal Compression business. In fact, GE bought Dresser Industries, a spinoff from Dresser-Rand, at a multiple of EV/EBITDA of 9.5 in 2010.

At a lower price, GE might have made a move for Dresser Rand. GE Oil and Gas CEO Lorenzo Simonelli recently said the division continues to look at M&A and expects to grow above industry averages as it integrates recent acquisitions. Bolt-on deals may be a focus for GE Oil & Gas, especially if other parts of the GE empire find deals like Alstom at single digit EV/EBITDA multiples.

Nonetheless, the results of GE's deal-making in the oil patch speak for themselves. GE's Oil & Gas is nearing $20 billion in annual revenue and it is the company's fastest growing business line by sales and profit as it weans itself from financial services. In compression, GE commands over 30% of the market globally and might have even presented an antitrust hurdle in a Dresser Rand bid.

The merits of the Siemens deal are likewise evident. Only a few years ago, Citigroup characterized North America as "the new Middle East" as a result of an onshore energy production boom and the infrastructure investment that would be required to transport oil and gas to terminals and hubs. Industrial giants like GE and Siemens, faced with a lackluster economic backdrop, are eager to bolster their revenue and profits by moving into the fast-growing energy sector.

"I think this simply is a reflection of Siemens' belief that the US market for oil services remains very attractive -- enough for them to invest at this point in the cycle and to pay a high enough multiple that they believe will prevent interlopers from outbidding them. Is it vindication for GE? Only to the extent that a large rival is paying up for an asset in a space where GE had been active for the last decade," Steven Winoker, an analyst at Bernstein Research, said in an email to TheStreet.

Winoker believes GE's oil and gas deals have begun paying off for shareholders within two-to-three years of their close given a trend of rising earnings in the sector.

Value Over Price

Siemens' Kaeser conceded Siemens is paying a high price for Dresser Rand, but he emphasized that the $3 billion-a-year business is crucial to Siemens growth strategy through the end of the decade. Kaeser also would have rather done a deal later in 2015, however, a competing bid from Swiss firm Sulzer forced Siemens' hand.

"Since May when we laid out our Vision 2020 concept, we knew at some point in time this is going to be something which we'd rather have to advance our value creation and execute on the strategy," Kaeser said in response to the analyst that questioned his M&A timing. He believes Dresser Rand will transform Siemens into important player in the U.S. energy market -- so much so Siemens is relocating the headquarters of its Energy division from Germany to Houston.

More importantly, Kaeser believes Dresser Rand's strong brand and its exposure to recurring services businesses will give Siemens a tent-pole in the oil and gas equipment space that could pay off as drillers begin to tap shale resources outside of North America.

"[W]e believe that the crown jewel is the premium brand of Dresser-Rand if it goes to market access," Kaeser said. Siemens said it may take years for the Dresser Rand acquisition to pay off for shareholders, and the integration may stretch a long time given the importance of legacy Dresser Rand employees to the combined company's oil and gas aspirations.

"We come away from the conference call on the Dresser Rand acquisition with an unchanged view that the strategic rationale for the deal is strong but that the price is too high with cost of capital unlikely to be reached this decade," JPMorgan analysts concluded on Monday. They, however, continue to give an "overweight" rating to Siemens stock.

-- Written by Antoine Gara in New York

Follow @AntoineGara

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