3nd UPDATE: Caterpillar To Buy Mining-Equipment Co Bucyrus For $7.6 Billion

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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