Siemens splurges $7.6 billion on Dresser-Rand in U.S. shale market bet

By Georgina Prodhan and Ludwig Burger

FRANKFURT (Reuters) - Germany's Siemens AG has agreed to buy U.S. oilfield equipment maker Dresser-Rand Group Inc for $7.6 billion in cash, paying a relatively rich price to belatedly beef up its presence in the U.S. shale oil and gas industry.

The acquisition, which ranks among the biggest in the history of the industrial group, will strengthen Siemens' position in the United States, its weakest region, and bring it nearer catching up with rival General Electric Co .

Siemens' oil and gas revenue will increase to around $11 billion, including the acquisition of Rolls-Royce Holdings Plc's energy gas turbine and compressor business, announced in May, from less than $7 billion before the two deals.

 

Analysts saw the deal - which coincided with another major German buy in the United States, Merck KGaA's agreed purchase of Sigma-Aldrich Corp , as strategic, but said the price looked high.

It gave Dresser-Rand an enterprise value of about 16 times earnings before interest, tax, depreciation and amortisation (EBITDA), about twice that of its peers.

"Siemens has largely missed out on the U.S. oil & gas ... boom over the past years," JPMorgan capital goods analyst Andreas Willi wrote in a note on Monday. "Siemens' increase in exposure comes potentially late in the cycle and value creation from this deal may have to depend very much on execution."

GE has spent $14 billion on acquisitions in the oil and gas field since 2007 and has built up a business there worth about $17 billion.

Siemens shares closed down 0.4 percent at 95.97 euros, broadly in line with European blue-chip stocks as a whole <.FTEU3>.

Siemens Chief Executive Joe Kaeser denied Siemens was pushed into bidding for Dresser-Rand because the U.S. group was about to agree a merger with Swiss pump maker Sulzer AG , whose Chairman Peter Loescher is a former Siemens CEO whom Kaeser ousted.

Sulzer said on Monday it had ended talks with Dresser-Rand.

Siemens said its $83 per share bid was unanimously supported by Dresser-Rand's board of directors, making it unlikely GE would now pursue a bid, although a source close to the matter told Reuters GE had made contact with Dresser-Rand.

The offer was 32 percent above Dresser-Rand's six-month average share price. Dresser-Rand had closed on Friday at $79.91, buoyed by weeks of takeover speculation.

Brian Langenberg, an analyst at Langenberg & Co, said Dresser was a good asset and arch-rival GE "should at least make sure Siemens is paying a full price". He added: "There may not be anything more to do here, but if there's something to do, GE would try it."

GE in June beat Siemens in a bidding war for the energy business of France's Alstom in a $16.9 billion deal.

SLOWING GROWTH

Annual capital expenditure on oil, gas and coal equipment has more than doubled in real terms since 2000 and surpassed $950 billion in 2013, according to the International Energy Agency. But JPMorgan estimated spending growth would slow to 4.7 percent this year and could decline in 2015.

Kaeser said Siemens' investment would pay off in the long term and said Dresser-Rand's large client base and the fact that half its sales are in high-margin services meant it would contribute to profits from day one.

"This industry does not count by quarter or year. This counts for a long period of time," he told analysts and journalists on a conference call. "We do agree the price has been on the high side but, then again, it matters more what value we created."

Unconventional gas, including shale and "tight" gas, already accounts for about 60 percent of production in the United States, where it is driving a wave of reindustrialision as the country approaches energy independence.

In Europe, where Siemens makes most of its sales, governments have eschewed shale gas exploration for environmental reasons and traditional power providers are suffering from weak demand and energy policy upheaval.

Siemens embarked on a corporate overhaul in May dubbed "Vision 2020", seeking to make up ground on more profitable competitors such as Switzerland's ABB Ltd as well as GE, while reducing its exposure to more cyclical consumer businesses where it has had limited success.

As part of that drive, Siemens said it had also agreed to sell its stake in household appliances joint venture BSH to partner Robert Bosch, bringing in 3 billion euros ($3.9 billion) to help finance the Dresser-Rand deal.

The group, which did not name any investment banks or other advisers, said it expects to close the deal by summer 2015 and aims to wrap up the sale of its BSH stake in the first half of 2015, ending a more than 45 year alliance in household appliances.

Siemens has had a chequered history in consumer markets. It sold its mobile phone business last decade, which later went bust. It exited the Fujitsu Siemens Computers joint venture in 2009 and spun off light-bulb maker Osram in 2013.

BSH will pay out 250 million euros to each of its owners before the transaction is completed.

(1 US dollar = 0.7800 euro)

(1 US dollar = 0.6124 British pound)

(Additional reporting by Silke Koltrowitz in Zurich, Edward Taylor in Frankfurt and Sophie Sassard in London, with Lewis Krauskopf in New York; Editing by Mark Potter and David Holmes)