BUCY Bucyrus International, Inc. (MM)

Caterpillar Inc’s (CAT) pending $8.6 billion buyout of Bucyrus International Inc. (BUCY) is now a step closer to being finalized as it has received a go-ahead by the U.S. Department of Justice. The clearance will allow the acquisition to be clinched by mid 2011 subject to other closing conditions being met.

In November last year, Caterpillar announced its intention to acquire Bucyrus, a South Milwaukee-based manufacturer of surface and underground mining equipment, in a transaction worth $8.6 billion (including debt). The deal is touted to be the biggest in the company’s history. The billions-of-dollar deal capitalizes on the rising demand for coal and minerals triggered by growth in the emerging nations.

Money Matters

Caterpillar will fund the acquisition through a combination of cash from its balance sheet and debt. Caterpillar does not plan to issue equity for the acquisition.

In December last year, Caterpillar entered into a bridge loan agreement of up to $8.6 billion from certain financial institutions led by JPMorgan Chase Bank, the investment bank arm of JPMorgan Chase & Co. (JPM) to fund the acquisition.

Under the bridge loan agreement, Caterpillar would have to maintain a net worth of at least $9 billion at all times in each fiscal year. Net worth in this case means consolidated stockholders' equity including preferred stock but excluding pension and other post-retirement benefits that are reflected in Accumulated Other Comprehensive Income or Loss.

According to the agreement, the bridge loan would have an increasing interest rate starting at 1.25 percentage points to 2 percentage points more than the London Interbank offered rate (LIBOR). The margin over LIBOR is dependant on the company’s credit ratings. The spread over the lending benchmark would increase every 90 days, within the range of 1.5 percentage points to 3.125 percentage points.

Acquisition Rationale

The combined portfolio will broaden Caterpillar's mining equipment product line resulting in the most expansive product offering in the mining equipment industry. Caterpillar expects the deal to be accretive to its profit in the first full year, excluding 50 cents per share of one-time charges.

Synergies expected from the deal include: Caterpillar remanufacturing products and services for Bucyrus equipment; sales and support from Caterpillar’s existing dealer network; use of Caterpillar’s engines and components in Bucyrus products; and cost efficiencies in purchasing, engineering and deployment of manufacturing best practices. In quantitative terms, synergy benefits are expected to noticeably add to operating profit in 2013 and exceed $400 million annually in 2015.

The acquisition is in line with Caterpillar’s set of goals for the year 2015, the second of three five-year plans focused on delivering Caterpillar’s Vision 2020. Caterpillar is focused on delivering superior earnings per share growth, operating profit after capital charge and cash flow. To attain this, among other initiatives, Caterpillar plans to expand its leadership in mining and accelerate its aftermarket parts and services business.

Caterpillar is riding on the wave of heightened construction and mining activity in the developing markets that triggers the demand for coal, copper and iron ore. The company expects demand for coal, copper and iron ore to continue expanding over the next decade.

Why Bucyrus?

Bucyrus is a world leader in the design and manufacture of high productivity mining equipment for surface and underground mining with reputed products and brands, generating revenues of $2.6 billion. Its surface equipment is used for mining coal, copper, iron ore, oil sands and other minerals, while its underground equipment is used primarily for mining coal.

In February, Bucyrus acquired the mining equipment business of Terex Corp. (TEX) for $1.4 billion, thus strengthening its position as a premier supplier of mining equipment. Following the deal, Bucyrus extended its geographic footprint, diversified its product portfolio and doubled its market share to over $30 billion.

Caterpillar has a narrow product line compared to Bucyrus. The acquisition will bring Bucyrus’ broad product portfolio of electric rope shovels, draglines, hydraulic shovels, drills, underground mining equipment, trucks and highwall miners and complement Caterpillar’s existing mining product line. Further, Caterpillar can leverage Bucyrus’ strong presence in the emerging markets, its successful aftermarket parts business and support services for its equipment.

Recent Notable Acquisitions

Caterpillar went on an acquisition and expansion spree last year. The most notable deals comprised the $810 million acquisition of Germany-based MWM Holding in October and Electro-Motive Diesel in August for $820 million in cash plus a net working capital adjustment of approximately $108 million. The Bucyrus deal, however, stands at almost five times the combined sum of the two abovementioned deals.

Caterpillar’s First Quarter Recap, Financial Position and Outlook

Caterpillar’s first-quarter 2011 EPS jumped to an all-time quarterly record of $1.84 from 36 cents in the year-ago quarter, driven by higher sales volume. Revenues surged 57% to $12.95 billion on the back of economic growth and improvement in machine demand.

Caterpillar had cash and short-term investments of $4.87 billion as of March 31, 2011, up from $3.59 billion as of December 31, 2010. Total debt stood at $29.59 billion as March 31, 2011.

For 2011, Caterpillar expects revenues in the range of $52 billion to $54 billion and EPS of $6.25 to $6.75, the highest estimated annual profit in the company’s history. However, the outlook does not include the acquisitions of MWM Holding GmbH or Bucyrus as they have not yet closed. We expect a revision in guidance and our estimates once these deals conclude.

Our Take

The Bucyrus acquisition will position Caterpillar as the leading global mining original equipment manufacturer and the combined product portfolio will dwarf Joy Global Inc. (JOYG), the only other manufacturer of surface and underground mining equipment in the US. Needless to say, Caterpillar’s strong brand name, pricing power and global dealer network place it in an advantageous position to exploit the growing need for infrastructure development worldwide. The shares of Caterpillar presently retain a Zacks #1 Rank (short-term Strong Buy recommendation) on the stock.

Peoria, Illinois-based Caterpillar Inc. is the manufacturer of construction and mining equipment, diesel and natural gas engines, and industrial gas turbines. The company is one of the few leading U.S. companies in an industry that competes globally from a principally domestic manufacturing base. Caterpillar operates three divisions – Machines, Engines and Financial Products. Caterpillar competes with the likes of CNH Global NV (CNH), Komatsu Ltd. (KMTUY) and Volvo AB (VOLVY).

 
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