Siemens's Dresser Deal Has Shades of Shell

Thao Hua
09/22/2014

A foreign behemoth risks getting burned trying to break into the U.S. shale boom.

But this isn't an oil major such as Royal Dutch Shell. RDSA.LN -0.96% This is German industrial giant Siemens, SIE.XE -1.76% buying Dresser-Rand DRC +0.26% Group for $7.6 billion. Like Shell, though, Siemens looks late to the shale game and is paying the price.

Siemens lost out to General Electric GE -0.06% for Alstom's ALO.FR -1.44% gas-turbine business earlier this year, but has now snagged Dresser, a leading supplier of equipment including compressors and gas turbines used to exploit shale resources.

Buying Dresser fits snugly into the strategy of Siemens's new chief executive Joe Kaeser. Faced with sluggish markets in Europe, where 54% of Siemens's revenue was generated in 2013, battling for a larger piece of the expanding U.S. energy industry makes sense. The potential for growth isn't only based on selling equipment, but also in servicing it, providing a relatively stable earnings stream.

But Siemens is paying up for the privilege, at more than 14 times the consensus estimate for Dresser's 2015 earnings before interest, taxes, depreciation and amortization. That is high by the standards of previous deals in the sector and far higher than Siemens's own multiple of about nine times.

Justifying that requires expectations of high growth or hefty synergies. Dresser doesn't quite tick the box in either case.

Within the gas-turbine sector, GE had a 47% global share of new orders in the first half of 2014, excluding Alstom, compared with Siemens's 27%, according to Credit Suisse. The rate of growth in the sector is falling, estimated to hit a trough in 2015 by Siemens's own metrics. Siemens expects that the market will heat up again, with an assumed annual growth rate of between 6% and 8%, but that remains to be seen.

In terms of synergies, Siemens's scale and wider reach present real opportunities to raise Dresser's margins and revenue growth. But Siemens's expectation of €150 million ($192 million) of annual synergies is blunted by the fact that this run rate isn't expected to be reached until 2019. That time scale requires a good deal of faith from investors.

And Siemens's track record makes faith an uncertain commodity. In its last deal of a comparable size, the company paid €5.1 billion to acquire clinical diagnostics company Dade Behring in 2007. Under its CEO at the time, Peter Loescher, Siemens bought Dade Behring when it was clocking a growth rate of about 8%, only to see that figure steadily fall to 2% following the purchase, according to analysts.

So far, shareholders have rewarded Mr. Kaeser partly for sending a strong message that he won't indulge in highly priced acquisitions. Since he took the helm, Siemens's stock has risen by at least 10%—though it has declined so far this year as confidence in his turnaround strategy has waned.

Getting into shale is a no-brainer. But as has been the case with oil majors buying exploration and production firms, it is investors in the smaller targets that tend to reap the benefits.