4th UPDATE: Caterpillar To Buy 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 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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