CAT Caterpillar Inc

Japanese company to pay $2.9 billion for mining-equipment maker Joy Global

By Bob Tita 

The struggling mining equipment industry will soon be dominated by two large companies: Japan's Komatsu Ltd. and its larger U.S. rival, Caterpillar Inc.

Tokyo-based Komatsu said on Thursday it would buy U.S. equipment manufacturer Joy Global Inc. for $2.9 billion in a bet that the mining-equipment market will grow again starting in 2019.

Tumbling prices for mined commodities, such as iron ore, copper and coal, have driven down demand for mining equipment, roughly a $50 billion-a-year global industry, according to analysts' estimates. Equipment makers have downsized operations and cut costs, while mining companies have indicated that their capital spending on equipment and mine expansions will continue to decrease next year.

But Komatsu, which already makes supersize dump trucks used in mining, said the acquisition would yield innovations that customers will want to buy as the market recovers and allow it to sell more complete lines of equipment.

The deal, which would be the largest in Komatsu's history, needs the approval of Joy's shareholders and has to be reviewed by antitrust regulators. Komatsu said it expects it to be completed by the middle of next year.

Komatsu is Japan's leading seller of construction equipment and the world's second-largest, behind Caterpillar, and already generates more than 80% of its sales outside Japan. Once the deal is completed, Komatsu and Caterpillar together would account for at least a quarter of the world's mining equipment sales,analysts say.

The Joy acquisition makes "excellent strategic sense," according to Stephen Volkmann, an analyst for Jefferies & Co. "The company will be able to provide the full line of mining equipment to compete with Caterpillar at all levels."

But the success of the deal will largely depend on the recovery of the equipment market.

Caterpillar pursued a similar strategy when it bought mining equipment manufacturer Bucyrus International in 2011 for about $8 billion. The deal looked like a shrewd move at the time -- when mined commodity markets were booming -- but equipment sales have collapsed in recent years.

Milwaukee-based Joy Global has long been seen as an acquisition target for a larger company. But more than half of Joy Global's annual sales come from the coal-mining industry, which has been hurt by low prices for natural gas and stricter environmental standards that reduced coal usage for generating electricity.

Komatsu said it plans to operate Joy, which currently has about 12,000 employees, as a separate subsidiary. Thursday's announcement didn't offer specifics about plants or the size of the Joy workforce going forward.

A smaller coal industry in the U.S. could have a lasting effect on Joy's business. Its sales last year were $3.1 billion, down 44% from a recent high in 2012.

In its most recent quarterly report, Joy said orders for new machinery were down 9%. Orders for service and repairs on machinery already in use -- a key revenue source for Joy -- dropped 14%.

Joy said in a statement that the decision to sell the company was based on "challenging market conditions the company believes are likely to persist." Joy executives declined to comment further.

Komatsu said it would pay $28.30 a share in cash for Joy's stock, a 20% premium to Wednesday's closing price. Joy Global's was recently trading up nearly 20% at $28.19.

Tokyo-based Komatsu is increasingly looking to acquisitions to propel sluggish sales of its machinery. Other companies could step up with higher bids for Joy, but the pool of potential candidates appears small, given the consolidation that has already occurred in the machinery sector, analysts say.

--Atsuko Fukase contributed to this article.

Write to Bob Tita at robert.tita@wsj.com

(END) Dow Jones Newswires

July 22, 2016 02:48 ET (06:48 GMT)

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