May 16, 2011 / 3:22 PM / 6 years ago

UPDATE 7-Joy Global eyes oil market with $1.1 bln Rowan unit buy

* Cash deal to add to Joy Global earnings in fiscal 2011

* Rowan sees after-tax proceeds of $875 mln

* More oil and gas sector deals seen in the pipeline

* Rowan shares trim gains; Joy Global up 1 pct (Adds background on deals in the industry, share prices)

By Thyagaraju Adinarayan and Soyoung Kim

BANGALORE/NEW YORK, May 16 (Reuters) - Mining equipment maker Joy Global JOYG.O is to buy Rowan Cos Inc’s (RDC.N) drilling and mining gear unit for $1.1 billion in cash, as it looks to offset stiff competition in its main market by entering the lucrative oil and gas drilling business.

Rising oil prices CLc1 and the rush for advanced gear to meet tougher regulations following last year’s Gulf of Mexico oil spill are boosting demand for drilling equipment makers, driving dealmaking in the sector over the past few months.

Joy Global’s expansion into a new market follows Caterpillar’s (CAT.N) $7.6 billion bid for main rival Bucyrus BUCY.O -- a deal that would leave Joy Global as the last stand-alone U.S.-based maker of mining equipment.

The deal for LeTourneau Technologies Inc underscores robust buyer appetite for assets in the oil and gas drilling and equipment space, which has seen the $7.3 billion merger of Pride International Inc PDE.N and Ensco Plc (ESV.N), as well as some $11 billion worth of deals struck by General Electric Co (GE.N) over the past year.

The LeTourneau Technologies transaction -- which some analysts said is expensive -- could also make Rowan more of a takeover candidate as it sheds businesses to become a pure-play drilling contractor, analysts said. [ID:nSGE68D0KQ]

LeTourneau, which accounts for 30 percent of Rowan’s annual revenue, designs jack-up drilling rigs and makes primary components for them. It also makes mining equipment such as large-wheel loaders.

“There was certainly a lot of pressure to do something in response to the Caterpillar-Bucyrus deal. That deal probably accelerated Joy Global’s plans,” said BB&T Capital Markets analyst Schon Williams.

That probably inflated the price Joy Global is paying, said Dahlman Rose & Co analyst Omar Nokta, noting the consensus value on LeTourneau, which has been on the market for three years, was $600-$800 million.

LeTourneau had revenue of $815 million last year. Joy Global’s 2010 revenue was $3.4 billion.

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DEALTALK on Rowan: [ID:nL4E7GG36O]

DEALTALK on industrials M&A: [ID:nN16299372]

Previous ANALYSIS on Joy Global: [ID:nSGE6AF0KP]

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Rowan had planned to run a dual-track process for LeTourneau -- considering a sale while setting the unit up for a spin-off. But Joy Global preempted that process with its bid, Rowan CEO Matt Ralls said on a conference call.

“When Joy came to us we agreed that at a certain price level, at $1.1 billion, we would allow them to do due diligence and make a concrete offer to us. And therefore, obviate the need to go through the overall sale process or spin-off,” Ralls said.

Shares of Rowan rose as much as 5 percent to a 2-week high of $40 on the New York Stock Exchange on Monday, but ended 0.2 percent lower at $37.96. Joy Global shares rose 1 percent to $88.36 on Nasdaq.

NEW MARKETS

Rowan said it will have after-tax proceeds of $875 million from the sale, which it will spend on the offshore drilling business or expansion into ultra-deepwater drilling.

In the next few quarters, the company is also expected to hive off its land rig unit -- valued at $275 million to $375 million by UBS analyst Angeline Sedita.

Joy Global, meanwhile, is on an expansion spree.

With LeTourneau, Joy Global -- known for its giant shovels and draglines -- will compete with oilfield service equipment makers Cameron CAM.N, FMC Technologies Inc (FTI.N) and National Oilwell NOV.N.

LeTourneau’s customer base in the drilling market has been restricted as the market for its equipment primarily includes Rowan’s rivals.

“The change of ownership will significantly expand LeTourneau’s market acceptance,” said Joy Global CEO Mike Sutherlin.

Joy Global had identified the oil and gas equipment business as an area for potential expansion and moved quickly when Rowan announce its intension to seperate the business, a person familiar with the process said.

“I think it will continue to be an active sector, because earnings are up, there is plenty of buy-side demand, so properties are fetching attractive valuations,” that person said.

Analysts had said Joy Global may look to flex its emerging market muscle and expand its product range in response to Caterpillar’s purchase of Bucyrus and dominance of the $40 billion mining gear market. [ID:nN15274061]

Joy Global, which will fund the deal in cash and additional borrowings, said LeTourneau will add to earnings in fiscal 2011.

BB&T’s Williams, who expects the LeTourneau deal to add 20 to 30 cents a share to Joy Global’s 2012 earnings, said the company could make more bolt-on acquisitions in the next 6 to 12 months.

Bank of America Merrill Lynch advised Joy Global, and Barclays Capital advised Rowan. (Reporting by A. Ananthalakshmi and Thyagaraju Adinarayan in Bangalore, and Soyoung Kim and Michael Erman in New York, Editing by Don Sebastian, Ian Geoghegan, Gary Hill)

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