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Caterpillar Inc. (CAT) has completed the biggest deal ever in its history, namely the $8.8 billion buyout of Bucyrus International Inc.

The deal capitalizes on the rising demand for coal and minerals triggered by growth in emerging nations.

In November last year, Caterpillar announced its intention to acquire Bucyrus, a South Milwaukee-based manufacturer of surface and underground mining equipment.

Money Matters

Caterpillar funded the $8.8 billion (including debt) acquisition through a combination of cash on its balance sheet and debt. The company issued $4.5 billion of new debt on May 24, 2011 at historically low rates. Caterpillar did not issue equity for the acquisition.

Acquisition Rationale

The combined portfolio broadens 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 in 2015.

Caterpillar is riding the wave of heightened construction and mining activity in the developing markets, triggered by the demand for coal, copper and iron ore. The company expects demand 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. 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 last year, Bucyrus had acquired the mining equipment business of Terex Corp. (TEX) for $1.4 billion, thus strengthening its position as a premier supplier of mining equipment. 

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

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 of 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 its history.

Our Take

The Bucyrus acquisition positions Caterpillar as the leading global mining original equipment manufacturer. The combined product portfolio dwarfs 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 put it in an advantageous position to exploit the growing need for infrastructure development worldwide. Shares of Caterpillar presently retain a Zacks #3 Rank (short-term Hold recommendation).

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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