Spring 2015 GE Corporate Finance Project Amy Xia Sophomore Finance The Team JP Gschwind Freshman Program of Liberal Studies Seung Hee (Teresa) Jeong Sophomore Finance Robert Larson Freshman Finance Matthew Mooney Sophomore Finance Jaclyn Daily Freshman Finance & Economics Paul Shin Sophomore Finance Alarisse Lam Freshman Finance & Economics Aidan Coronel Sophomore Finance Maddie McCormick Sophomore Finance 3 Executive Summary Defining the Problem Oil price slides have had a temporary negative impact on GE Oil & Gas performance, however as oil prices are projected to increase the Oil & Gas segments performance will stabilize. Strategy GE has a strong portfolio in oil related products and services, however with oil prices projected to rebound, demand for alternative energy sources will increase. GE can supplement the Oil & Gas segments long-term growth through investing in the growing liquefied natural gas industry. Recommendation Chart Industries, Inc. is the worlds leading single-source LNG equipment & solutions provider. Acquiring Chart Industries would allow GE to capitalize on the LNG industrys growth. Our valuations further show that Chart Industries is an attractive acquisition target from a quantitative perspective. DEFINING THE PROBLEM 4 5 Source: Forbes, Business Insider, BBC, Economist, EIA Analysis of Oil Price Fluctuations OPEC Could not reach an agreement on production quota in November Countries competing for market share United States Increased efficiency Production has risen 45% over past 4 years Large storages of oil up to 106 million barrels above the 10-year average Causes Higher US output and growing reserves cause downward pressure on oil prices but they are projected to increase and then stabilize. Effects High Supply Economic pressure on oil reliant countries Increased activity in transportation industries Trouble for companies in the oil industry Decreased demand for alternative energies Oil Price Past Performance/Projections Current Value: $56.00 per barrel 2020 Forecasted Value: $72.60 per barrel Current Performance: Oil prices are highly volatile Wide range of external factors Outlook: Will continue to face downward pressure until reserves are sold off Expected to trend higher over next 5 years World Price of Crude Oil $56.00 6 Source: Edgar, GE.com; Hoovers Drop in Oil Prices Impact on GE Impact on GE Oil & Gas Oil & Gas Financials 2014 y/y ($ in millions) 4Q 2014 (V%) 1Q 2015 (V%) Revenue10(6)(8) Segment Profit191(3) Orders on equipment and machinery fell 10% Investors worried about continuing falling prices Still benefit from providing services to wells currently in production GEs Response Cutting costs through personnel reduction and restructuring Plant consolidation and removal of excess enterprise resource planning systems Relying on successful Aviation and Transportation segments Aiming to grow industrial organic sales at 2-5% annual rate 2014E2015F Power & Water+++ Oil & Gas++=/- Energy Management+++++ Aviation+++/++ Healthcare++ Transportation-+ A&L+- GE Growth Estimates by Sector Rising oil prices increase demand for alternative energy With oil prices expected to rebound, GE Oil & Gas segment profit will stabilize In the short-term, GE has cut costs to maintain their profit margin until oil prices rebound. This can be supplemented by investments in growing alternative energy markets. GE Oil & Gas Outlook OPPORTUNITY 7 8 Source: Wall Street Journal, LNG Journal, oilandenergydaily.com, EY Industry Overview Major Players (US Companies with Exporting Licenses) Projected Global LNG Demand (Millions of Tons) With a projected increase in demand and the start of US exports, the LNG Industry is preparing for rapid expansion. GE can capitalize on this opportunity by growing its LNG equipment and services business. Current State of LNG Industry Oil price fall temporarily lowered demand, particularly in Asia Many Asian-Pacific and Middle Eastern countries already heavily invested in LNG infrastructure US set to begin exporting in late 2015 LNG producers preparing for substantial expansion with substantial investments Key Industry Drivers Price competitive with oil Naturally abundant in the US and Russia Liquefied Natural Gas allows efficient and safe transportation of natural gas The Advantages of Natural Gas Excess supply of natural gas Increasing International Demand US producers looking to export using LNG Recent Developments 9 Source: Google finance, Wartsila website, Air Product website, MicroLNG website, Cryostar Website, Chart Industries Website A Strategy to Capitalize on LNG Ride the LNG Wave Strong opportunities in the LNG industry that GE could capitalize on through an expansion of its product portfolio and strengthening its industry position. GE can do this through an acquisition of an industry leader in the LNG equipment and solutions area. This would complement well with GEs already strong position in the heavy equipment manufacturing business. Why Chart Industries? Market Cap: $11.02 billion Pro: Highly globalized and focused in key growth areas (Europe and Asia) Con: High focus on LNG shipbuilding Market Cap: $32.46 billion Pro: Established public company with large market cap Con: Very diversified but LNG equipment makes up a very small portion of sales Market Cap: n/a Pro: Highly specialized in custom natural gas equipment manufacturing Con: small to medium scale production Market Cap: n/a Pro: 90 percent of sales are exported Con: Small subsidiary (214 million in total sales) Market Cap: $1.24 billion Pro: US company with growing profit margins and sales Established public company of suitable size based on GEs acquisition history An Industry leader shown by the multiple high profile contracts its won Relatively low stock price of $40.38 but steadily increasing Industry Leaders An acquisition of Chart Industries would strengthen GEs existing LNG business and position it ideally to fully capitalize on the LNG opportunity. Strategic Positioning 10 Source: S&P Capital, Chart Industries, Chart Industries 4Q, Chart Industries 8Q Chart Industries: Leader in LNG Despite risk factors, Chart Industries leading position and strength within the LNG market along with overall growth make it an ideal company for GE to acquire. Risk Factors CAGR 21% Worlds leading single-source LNG equipment & solutions provider across the complete LNG value chain Operate in three segments: Energy & Chemicals (E&C), Distribution & Storage (D&S), and BioMedical Primary customers are large, multinational producers and distributors Leading Industry Positions Services end markets in energy, industrial, life sciences and healthcare Unique Business Portfolio Strategically diversified Dependent on technological capabilities and manufacturing quality control Fundamentally Strong The markets they serve are subject to cyclical demand and vulnerable to economic downturn Unpredictable Demand Downward pressure on the demand and prices due to low oil prices However, E&C orders alone increased by 15.1% in 2014 compared with 2013 Decreases in Energy Prices Depends on ability to allocate resources optimally to maintain efficient operations Possible Inability to Manage Operational Expansions Past Growth CAGR 31% 11 Source: Chart Industries, GE Oil and Gas, Chart Industries 10K Reports Chart Industries Financials With $582M in liabilities, $204M of which is in Long-term debt, Chart Industries has less debt than competitors of the same size Low Risk Capital Structure LNG related sales accounts for 30% of end market sales Reported 40% sales growth in the quarter on strong LNG liquefaction and petrochemical applications in the E&C sector LNG Related Sales Growth Chart Industries diversified global presence and its sales heavily attributed to the E&C and D&S sectors suggest continued future growth due to a predicted boom in the LNG market. Financial Strengths Key Financials by Segment $ in millionsE&CD&SBioMedical 2014 Sales $388.0$578.8$226.1 % of Total Sales 32%49%19% Gross Margin 29%28%36% Growth Strategy Maintain its leading position in the LNG sector by investing in additions to existing manufacturing operations, introducing a new line of lower-cost standardized liquefaction plants. Expand activity across the LNG activity chain and continue its long-standing relationships with numerous companies such as ExxonMobil, Samsung, and PetroChina. Global End Markets VALUATIONS 12 Source: Yahoo Finance Comparable Companies Praxair, Inc. (PX) Produces, sells, and distributes atmospheric, process, and specialty gases and the machinery to produce industrial gases, as well as machinery surface coatings. Operates in North America, Europe, South America, and Asia. Market Cap: $35.34 billion Colfax Corporation (CFX) Provides gas and fluid handling machinery and fabrication technology products and services worldwide. Its customer base is both commercial and governmental. Market Cap: $5.81 billion Nordson Corporation (NDSN) Engineers, manufactures, and sells products for dispensing and processing commodity material coatings and adhesives. Also involved in polymers, sealants, biomaterials, fluid management, testing and inspecting, surface treatment, and curing. Market Cap: $4.85 billion ESCO Technologies Inc. (ESE) Produces and supplies engineered products and systems for utility, industrial, aerospace, and commercial markets worldwide. It operates through three segments: Filtration/Fluid Flow, RF Shielding and Test, and Utility Solutions Group. Market Cap: $ million CIRCOR International, Inc. (CIR) Designs, manufactures, and distributes valves and other engineered products to the energy, aerospace, defense, and industrial markets worldwide. Market Cap: $ million Comparable Companies Analysis 14 Company NamePrice on 4/8/1552 Week HighEquity ValueEnterprise ValueEV/RevenueEV/EBITDAEV/EBITPrice/Earnings Praxair Inc. $ $ $36,212 $45,9073.7x12.2x17.6x21.4 Colfax Corporation $46.56 $75.73 $5,713 $7,1521.5x12.2x17.5x15.4 Nordson Corporation $78.65 $84.95 $5,058 $5,8293.4x13.6x15.9x20.5 ESCO Technologies Inc. $38.12 $39.73 $1,016 $1,0211.9x12.7x16.0xNA CIRCOR International, Inc. $55.40 $83.13 $984 $8771.0x10.3x13.3x19.5 Mean $68.22 $83.68 $9,797 $12,1572.3x12.2x16.1x19.2 Median $55.40 $83.13 $5,058 $5,8291.9x12.2x16.0x20.0 Chart Industries, Inc. $40.38 $84.94 $1,238 $1,3511.1x7.4x9.8x15.2 Financial Statistics (millions) Company NameRevenueGross MarginEBITDAEBITDA Margin Praxair Inc. $12,27343% $1,17031% Colfax Corporation $4,62432% $17513% Nordson Corporation $1,70455% $6025% Esco Technologies Inc. $53139% $1615% CIRCOR International, Inc. $84131% $2010% Mean $3,99540% $28819% Median $1,70439% $6015% Chart Industries, Inc. $1,19330% $18115% Chart Industries has a low EBITDA multiple due to its relatively high EBITDA, and its capital structure, which consists of significantly less debt than its industry peers, making it an attractive acquisition. Precedent Transactions 15 Source: bloomberg, seekingalpha Date Announced BuyerTarget Transaction Value LTM Revenue LTM EBITDA Implied Enterprise Value/ RevenueEBITDA (all figures presented in USD millions) 8/1/2012National-Oilwell Varco Inc. Robbin & Myers, Inc.$2,540$1,035$2542.8x10.0x 6/25/2014C&J Energy Services Inc.Nabors Industries Ltd.$2,860$2,812$6111.3x4.6x 9/22/2014Siemens AG Dresser-Rand Group Inc.$7,600$6,804$3302.7x23.3x Mean 2.3x12.6x Median 2.7x10.0x Precedent Transactions Valuation Summary Precedents Set ($mm) BuyerTargetMultipleRationale National-Oilwell Varco Inc. Robbin & Myers, Inc.10.0x Complementary products that can be incorporated into NOVs existing divisions C&J Energy Services Inc.Nabors Industries Ltd.4.6x Nabors has been incorporated in tax-free Bermuda since 2002 allowing C&J to bring its 37% tax rate down Siemens AG Dresser-Rand Group Inc.23.3x Adds to Siemens energy business, especially in the U.S. where it hasnt been as strong Robbin & Myers Inc.s and Nabors Industries Ltd.s market caps are the most similar to Chart Industries; thus we approximate Charts EV/EBITDA multiple to be similar to the 7.3 average multiple of these two companies. Discounted Cash Flow 16 Cash Flow Forecasts WACC Sales 1, , , , , , , % growthN/A16.1%1.3% -5.0%7.0%8.0%9.0% COGS , , Gross Profit % margin30.1%29.9%30.0% SG&A EBITDA Depreciation & Amortization EBIT Income Taxes29.9%26.4%30.3% EBIAT Adjustments: Less: Increase in NWC(69.60)(68.30)(4.80) 16.40(10.10)(14.80)(18.10)(22.00) Less: Capital Expenditures(43.70)(72.60)(62.10)(62.00)(65.10)(69.70)(75.30)(82.00) Plus: Depreciation & Amortization Free Cash Flow 6.45(0.40) % Change in FCF (106%)18077%28%(24%)1%5%6% Discounted Free Cash Flow WACC Assumptions Risk-free Rate2.40% Market Risk Premium5.00% Levered Beta1.05 Cost of Equity7.65% After-tax Cost of Debt5.50% Weight in Debt19.10% Weight in Equity80.90% WACC7.24% Exit Multiple7.40x Enterprise Value $1, Less: Total Debt($209.00) Less: Noncontrolling Interest($7.20) Plus: Cash and Cash Equivalents $ Implied Equity Value $1, Shares Outstanding (in millions)30.7 Implied Share Price $47.83 Cash Offer Price per Share $50.48 Exit Multiple 6.4x6.9x7.4x7.9x8.4x 6.24% % % % % WACC Conclusion 17 Placed economic pressure on oil industry Expected to trend higher Oil Price Slides GEs diverse portfolio kept damage minimal Most affected Oil & Gas responded by cutting costs until oil price rebound Impact on GE Strength in diversity of portfolio Opportunity for growth in LNG Moving Forward Through the acquisition of Chart Industries, GE can position themselves as strong leaders in the growing LNG market thereby increasing revenue and GEs value with a further diversified industrial portfolio. Chart Industries current financial position and growth strategies make it an appealing target Chart Industries is a leading single-source provider, present across the whole LNG value chain GE can capitalize on this opportunity by an acquisition of an industry leader Natural Gas industry expected to boom in late 2015 as companies begin to export excess supply Situation Recommendation Compared to similar companies, Chart is undervalued Cash offer price per share of $50.48, which is a 25% premium on current prices GE can maximize profit by acquiring now, before the industry begins growth Valuation