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Quick Take: Acquiring Robbins & Myers (NOV)
Posted by: Chandan Dubey (IP Logged)
Date: April 25, 2013 09:18AM

National Oilwell Varco (NOV) is one of the businesses which I really want to own. I have been keeping an eye on the stock since July 2012 (Stocks to Buy on Dips: National Oilwell Varco).

The company manufactures tools, reusables and machines for the drilling industry. It is arguably the best supplier of equipment and services to the oil and gas industry.

The company has a very good track record and the management is exemplary. In any case, it is important to keep an eye on the decisions it makes. Since 2010, NOV has made 13 deals, according to S&P Capital IQ, and is one of the most active buyers. I am going to look if it overpays for companies or not. The representative deal that I am going to pick is Robbins & Myers. In August 2012, NOV bid for Robbins & Myers at $60 a share, paying $2.5 billion for it.
Quote:
Robbins & Myers Inc. is a leading supplier of engineered equipment and systems for critical applications in global energy, industrial, and chemical markets.
Balance sheet (Nov. 30, 2012): RBN has a very good balance sheet with no long-term debt. It has $494,000 in short-term debt and $184.873 million in cash and equivalents. There is $103 million in other long-term liabilities. So, the company has nearly $84 million in cash on its balance sheet.

Key Figures



20112010200920092007
FCF ($mn)72.777.934.167.548.5
CapEx/OCF0.270.120.3420.2450.246
Income/Asset0.050.0360.0670.080.06


We first notice that the company is in a low capital-intensity business. It has always had a positive FCF and seems to have been quite well managed. It has around 6% RoA over the last five years without using much debt.

Given that the FCF has been quite good and has grown at 9% CAGR over the last four years, let us try our hands on reverse DCF. A price of $2.3 billion for the company says, what about the assumed growth rate? With 10% discount rate the assumption is 14% growth for 10 years and then 2% terminal growth rate. On a DCF basis assuming the huge growth, it does not seem that NOV paid a lot for the company.

NOV paid 30 times FCF and 2.5 times sales for the company. This is high — if bought by a value investor. But a company will not get the same price because they have to come up with an offer which is going to make sense to the board of directors. Given that Robbins & Myers has managed to grow revenue and FCF at 10% and has a strong balance sheet, I would not call the price paid by NOV expensive. In fact, it might be one of the cases where the price looks quite good.


Stocks Discussed: NOV,
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