Cameron’s Compression Business Fetches ‘Savory Price’ From GE
To acquire the Houston-based company's Reciprocating Compression division.
In a deal that will help Cameron International Corp. (NYSE: CAM) sharpen its business focus, GE Oil & Gas (NYSE: GE) said Jan. 20 it had agreed to acquire Cameron’s Reciprocating Compression division for $550 million.
The division provides reciprocating compression equipment and aftermarket parts and services for oil and gas production, gas processing, gas distribution and independent power industries. The division generated sales of approximately $355 million in 2012, has about 900 employees and operates from 20 global locations.
“Although the announcement of this divestiture was somewhat expected, the realized price is a savory one,” said Brian Gamble, an analyst for Simmons and Co. International. The reciprocating business is generating low-to-mid teen EBITDA margins currently.
In the third quarter of 2013, Cameron reported a 12% decline in orders for reciprocating compression equipment as a result of large project awards received in the first nine months of 2012 for units and compressors that did not reoccur during the first nine months of 2013.
Cameron, a Houston-based provider of flow equipment, systems and services, will likely see negligible earnings accretion potential from the deal but the company will benefit from divesting the gas compression business and focusing on drilling rigs and production equipment, said Scott Gruber, a Bernstein Research analyst.
“Overall, we continue to believe that Cameron offers greater upside than other turn-around stories in the group given the margin upside from new plant start-ups, greater interest amongst buyers in potential divestitures, an under-levered balance sheet, free cash flow generation and the company's cash return program,” Gruber said.
Cameron also announced that it intends to explore strategic alternatives for its centrifugal gas compression division. The division recorded $365 million in sales during 2013. GE is already a supplier of centrifugal gas compressors which likely explains why the division was not included in the deal, analysts said.
Jack Moore, Cameron chairman, president and CEO said the company’s current and planned divestments will streamline the operations to build on strong sales and order momentum in our core markets “while selectively expanding product and service offerings in strategic growth areas. The proceeds from the transaction will provide us with greater financial flexibility and afford us the opportunity to drive additional value for our shareholders."
High-speed reciprocating compressors are used in several applications from gas gathering, gas lift and injection, as well as transmission and storage. The development of shale oil and gas fields, particularly in North America, has increased demand for high-speed reciprocating compressors. As shale extraction spreads to Asia, South America and elsewhere, GE said the acquisition will position it to serve the industry globally.
"This acquisition will benefit our employees, customers and GE shareholders alike,” said Lorenzo Simonelli, president and CEO of GE Oil & Gas. “Our increased strategic focus, the buoyant oil and gas sector and our track record in providing high-quality support to customers combined with Cameron’s Reciprocating Compression division will position us for accelerated growth.”
Oil & Gas is one of GE’s fastest-growing businesses, with orders rising from less than $1 billion per year in 1994 to nearly $20 billion today and profits growing at an average 16% over the past three years.
Cameron’s Reciprocating Compression division will become part of GE’s Oil & Gas recently formed Downstream Technology Solutions business in order to better serve the $11 billion downstream and distributed gas segments. The new business is designed to deliver products, services and packaged solutions for both the traditional downstream and the evolving unconventional oil and gas space.
Richard Stegall, president of Cameron’s Reciprocating Compression division, said, “We are very excited at the prospect of joining GE Oil & Gas and the Downstream Technology Solutions business. Given our collective breadth of service offerings, the combination will greatly benefit both companies’ customers and employees. We have achieved good growth over recent years, and we anticipate that this trajectory will continue with the support of GE Oil & Gas."
After-tax proceeds will be about $400 million and will be used for Cameron’s share buyback program. Cameron expects to close the deal during third quarter of 2014.
Citi is acting as financial advisor to Cameron and Winston & Strawn and Baker Botts are acting as the Company's legal counsel in connection with the divestiture of the Reciprocating Compression business. Citi is also assisting Cameron in the process of exploring strategic alternatives for its Centrifugal Compression business.