3nd UPDATE: Caterpillar To Buy Mining-Equipment Co Bucyrus For $7.6 Billion
November 15 2010 - 2:01PM
Dow Jones News
Caterpillar Inc. (CAT) announced plans Monday to acquire mining
equipment maker Bucyrus International Inc. (BUCY) for about $7.6
billion, providing greater exposure to surging global markets for
commodities at a time when the outlook for its construction
machinery remains cloudy in the U.S. and other developed
economies.
The company, already the world's largest manufacturer of
bulldozers, excavators and wheel loaders, has longed eyed mining as
a sector to expand its equipment footprint. Caterpillar dominates
the market for huge dump trucks used at mine sites and it announced
plans earlier this year to begin offering its own mining
shovels.
By buying Bucyrus, Caterpillar avoids the cost and uncertainty
of launching a new product line from scratch. Bucyrus provides
Caterpillar with a broad and well-respected product portfolio of
electric-powered mining shovels, drag lines, drills and underground
coal mining equipment that compliments mining machinery. The
Milwaukee company recently overtook cross-town rival Joy Global
Inc. (JOYG) as the world's largest mining equipment maker when it
bought the mining equipment business of Terex Corp. (TEX) earlier
this year.
"Bucyrus is a great company with deep, deep roots in mining and
manufacturing," Caterpillar Chairman and Chief Executive Doug
Oberhelman said during a conference call Monday. "As we put the two
companies together, it will offer the broadest product range in the
industry."
The purchase of Bucyrus is the largest deal in Caterpillar's
history and the boldest move since Oberhelman took over the
leadership of the company in July. The proposed deal is scheduled
to close in the middle of 2011.
Caterpillar said the addition of Bucyrus would add to its
operating profit and cash flow in its first full year, excluding a
50-cent per share charge for integration expenses. Caterpillar said
synergies would start in 2013 as Bucyrus equipment features
Caterpillar components and engines and is sold through
Caterpillar's dealer network. The company expects the deal to
contribute more than $400 million annually to Caterpillar's
operating profit starting in 2015.
In 2009, Bucyrus reported net income of $312 million, or $4.12
per share, from sales of $2.65 billion. The company had an order
book of $2.53 billion at the end of the third quarter. Bookings
have recovered over the past year following a slump in demand when
a commodity bubble burst in mid-2008. Analysts expect Bucyrus to
earn $3.56 per share this year on sales of $3.56 billion.
Bucyrus Chief Executive Tim Sullivan said the combination will
provide Bucyrus' customers with a full-line of equipment at lower
costs than if the two companies sold limited, separate lines of
machinery.
"They don't really want to work with a lot of different
suppliers," Sullivan said about Bucyrus' customers. "This clearly
fits well with what they've asked us to do."
Sullivan said Oberhelman approached him about 60 days ago about
acquiring his company. Sullivan said there were no other suitors
bidding for Bucyrus and added that he was not soliciting bids for
the company.
Caterpillar is offering $92 for each Bucyrus share, a 32%
premium to Friday's closing price, with debt lifting the enterprise
value of the deal to $8.6 billion. The purchase price translates
into a deal multiple of about 11 times Bucyrus' anticipated 2011
earnings before taxes and interest expenses. Industrial companies
in cyclical industries typically sell at multiples for less than
that.
"It's definitely a very rich valuation," said Heiko Ihle, an
analyst for Gabelli & Co.
Oberhelman said he does not consider the price for Bucyrus to be
excessive because the Caterpillar is obtaining an product lines it
doesn't currently offer.
"In my mind, we paid a fair and full price," he said. "There's
no product overlap to speak up. We're we feel pretty good about
it."
Bucyrus is the third significant deal for Caterpillar in recent
months. The Peoria, Ill., company purchased U.S. train locomotive
manufacturer Electro-Motive Diesel in August and last month
announced plans to purchase German engine maker MWM Holding
GmbH.
The Bucyrus purchase will be funded through a combination of
cash, debt and up to $2 billion in new equity. Caterpillar said it
will keep the mining-business headquarters in South Milwaukee, Wis,
and it will maintain the Bucyrus brand.
Caterpillar's willingness to pay up for Bucyrus illustrates its
confidence that markets for iron ore, copper, aluminum, coal and
other mined commodities will continue to strengthen in the coming
years from increased demand from developing countries, mainly China
and India.
Fast-growing economies in Asia and South America have been
Caterpillar's best-performing markets for construction machinery
lately. Conversely, demand for machinery in North America,
Caterpillar's largest geographic market, has recovered more slowly
following the collapse of the housing and commercial construction
markets in 2008. Although North American sales have rebounded
lately as Caterpillar dealers rebuild depleted inventories, the
continuing slump in the housing construction market and an anemic
outlook for gross domestic product growth in the U.S. and Europe
are likely to be headwinds for Caterpillar's sales and profit in
2011.
Shares of Bucyrus were recently up 29% at $89.72. Caterpillar
shares were 2.8% higher at $83.34.
-By Bob Tita, Dow Jones Newswires; 312-750-4129;
robert.tita@dowjones.com
--Nathan Becker, Doug Cameron and James R. Hagerty contributed
to this article.
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