4th UPDATE: Caterpillar To Buy Bucyrus For $7.6 Billion
November 15 2010 - 6:13PM
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 long 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 complements Caterpillar's 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."
Caterpillar's stock ended Monday's regular trading session up
0.96%, or 78 cents, at $81.82 a share. Bucyrus, meanwhile, surged
29%, adding $20.18 to close at $89.80 a share.
In after-hours trading, Caterpillar was recently up 0.04% at
$81.85, while Bucyrus was off 0.06% at $89.75.
The purchase of Bucyrus is the largest deal in Caterpillar's
history and marks a bold start to Oberhelman's leadership of the
company, which began in July. The proposed deal, which began when
Oberhelman approached Bucyrus 60 days ago, is scheduled to close in
the middle of 2011.
Caterpillar said Bucyrus acquisition 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 cost
synergies would start in 2013 as Bucyrus equipment features
Caterpillar components and is sold through Caterpillar's dealer
network. Caterpillar expects the deal to contribute more than $400
million annually to its 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 $3.58 per share this year on sales of $3.56 billion.
Bucyrus Chief Executive Tim Sullivan said the combination should
benefit Bucyrus customers by lowering production costs for
machinery and eliminating the need to work with multiple equipment
companies.
"They don't really want to work with a lot of different
suppliers," Sullivan said. "This clearly fits well with what
they've asked us to do."
Caterpillar's offer with Bucyrus's debt included is about 10.5
times expected 2011 earnings before taxes and interest expenses at
Bucyrus. Industrial companies in cyclical industries typically sell
at lower multiples than that.
"It's definitely a very rich valuation," said Heiko Ihle, an
analyst for Gabelli & Co. Bucyrus paid about 10 times forward
earnings for Terex's mining business earlier this year, according
to analysts.
"Did we overpay?" Caterpillar's Oberhelman said in response to
questions during a conference call with investors. "No. In my mind,
we paid a fair and full price."
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 for $820 million. Last
month the company announced plans to purchase German engine maker
MWM Holding GmbH for $810 million.
The Bucyrus purchase will be funded through a combination of
cash, debt and up to $2 billion worth of shares that Caterpillar
plans to sell. 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.
"You're betting on the commodity cycle that you're going to get
this gigantic growth," said Joel Levington, managing director of
credit research for Brookfield Investment Management in New York.
"I do think that layers in some risk."
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 restore 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.
-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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