BUCY Bucyrus International, Inc. (MM)

Shortly after Caterpillar Inc. (CAT) received its go–ahead from the U.S. Department of Justice for the pending $8.6 billion buyout of Bucyrus International Inc. (BUCY) , the company has sprung into action by selling $4.5 billion bonds, its biggest ever corporate debt sale on record.

Normally, Caterpillar sells bonds through its unit Caterpillar Financial Services Corp., which offers equipment financing and loans for customers and dealers. Caterpillar has not issued debt at the parent-company level since 2008.

In November 2010, following the company’s announcement of its intention to buy Bucyrus, it had planned to fund a part of the $8.6 billion consideration by issuing up to $2 billion in equity. Caterpillar has now scrapped the idea of issuing equity and has sold $4.5 billion in bonds to fund the same. The balance of the acquisition will be paid for with $800 million in commercial paper and $3.3 billion in cash on hand.

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 terms of agreement, Caterpillar has the option to issue senior notes and/or equity in lieu of all or a portion of the drawing under the Bridge Loan Facility. The Notes in this offering are being issued in lieu of Caterpillar’s drawing on the Bridge Loan Facility. The bridge lender commitments will be reduced by the amount of bonds sold.

The 5-part issue will include 18-month and 2-year floating-rate note pieces and 3-, 10- and 30-year fixed-rate tranches. The 18-month floating-rate tranches will be $500 million and the 2- and 3-year notes will be $750 apiece, while the 10- and 30-year pieces will be $1.25 billion each.

The 18-month floater was launched with a risk premium of 10 basis points over the 3-month London Interbank Offered (LIBOR) rate while the 2-year was launched at 17 basis points over LIBOR. The 3-year piece was launched with a risk premium of 50 basis points over Treasury bonds. The 10-year tranche was launched at 85 basis points while the 30-year was launched at 98 basis points over Treasury bonds. Moody's assigned A2 ratings to the debt.

As of March 31, 2011, Caterpillar had a cash horde of $4.87 billion as of March 31, 2011. The company has $19.9 billion of long-term debt maturing after one year.

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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