Energy service equipment giant National Oilwell Varco (NYSE:NOV) has never exactly been shy about doing deals, with six deals in the second quarter of 2012 alone, and the company announced another large plunge the morning of August 9. National Oilwell announced a friendly all-cash deal to acquire smaller equipment maker Robbins & Myers (NYSE:RBN) for $2.5 billion.
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National Oilwell is paying $2.5 billion, or $60 per share in cash. At that price, not only are Robbins & Myers shareholders getting a 28% premium to the close on August 8, but a roughly nine times multiple to 2013 EBITDA. While popular names in the space like National Oilwell or Cameron (NYSE:CAM) can sometimes trade at low teens EBITDA multiples, this is a respectable premium for a group that often trades in the six to eight times range.
What National Oilwell Is Getting
Due in part to acquisitions of its own, Robbins & Myers runs primarily two businesses - fluid management and process solutions. Fluid management is the more obviously synergistic business to National Oilwell, as the company sends hydraulic drilling equipment, blow-out preventers, pressure control systems, wellhead equipment, trees and manifolds. On the other side, Robbins & Myers' process solutions business sells reactors, storage vessels, heat exchangers and various systems into markets like pharmaceuticals and specialty chemicals.
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In the press release, National Oilwell highlighted the company's downhole tools, pumps and valves as being particularly appealing components of Robbins & Myers. To that end, I wouldn't be entirely surprised if National Oilwell would consider selling some of the less energy-specific segments to other buyers, though the company's relatively large size within the pharmaceutical capital equipment space could limit the number of potential buyers.
Prudent Aggression or Stretching too Far?
Although National Oilwell has $2 billion in cash on the balance sheet, about $1.7 billion is held overseas and subject to taxation if repatriated. Consequently, the company is almost surely going to have to tap the debt market to fund the deal. With close to $1.5 billion in debt already, this is not a trivial development given the erratic and unpredictable swings of the energy services business (but the all-too-predictable obligations of interest and debt payments).
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Perhaps National Oilwell can figure out a creative arrangement similar to what Johnson & Johnson (NYSE:JNJ) did in its Synthes deal and utilize some of that overseas cash. Either way, while it represents an aggressive move from management, it seems like prudent aggression given both the long-term outlook for oil and gas development and the land-grab from companies like Cameron and General Electric (NYSE:GE) that is depleting the roster of attractive equipment acquisition candidates.
The Bottom Line
I'd be surprised to see a rival bidder step in, and this is just another step in National Oilwell living up to its nickname of "No Other Vendor" in the rig equipment space. While it's a large deal, it doesn't immediately jump out as a transformative deal - it looks much more like National Oilwell doing "more of the same" and simply enhancing its capabilities in areas like valves and so on.
I've long been a fan of National Oilwell, and though I think the company probably needs to take five on the recent pace of M&A, it usually works well when an already-leading company adds even more capabilities and products to its repertoire. Although the stock isn't a huge bargain today, it does look cheap enough to buy with the expectation of solid gains over the coming years.
At the time of writing, Stephen D. Simpson did not own shares in any of the companies mentioned in this article.