Caterpillar Inc. (CAT) is all set to buy Bucyrus International Inc. (BUCY), a South Milwaukee-based manufacturer of surface and underground mining equipment, in a transaction worth $8.6 billion.
The deal, if it gets through, would be the biggest in the company’s history. The billion-dollar deal capitalizes on the rising demand for coal and minerals triggered by growth in the emerging nations. The acquisition, subject to regulatory and Bucyrus shareholder approvals, is slated to close in mid-2011.
Transaction Details
Caterpillar will fund the consideration of $8.6 billion through cash, up to $2 billion in equity and includes assumption of $1.0 billion in debt. Bucyrus shareholders will receive $92 per share, which translates to a premium of 32% on Bucyrus’ share price as of November 12, 2010.
Rationale Behind the Acquisition
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, i.e., 2012, 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, and 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.
Caterpillar’s Recent Notable Acquisitions
Caterpillar has been on an acquisition and expansion spree this year. The most notable deals were the $810 million acquisition of Germany-based MWM Holding in October and of 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 Third Quarter Result, Financial Position and Outlook
Caterpillar delivered an EPS of $1.22 in its third quarter, surging 91% from 64 cents in the year-ago quarter and handily beating the Zacks Consensus Estimate of $1.09. The outperformance was driven by improved sales across all regions, particularly led by developing economies and the company’s relentless focus on cost-cutting. The bright spot of the quarter was the strength in developed economies, which showed improvement after deep declines in 2009.
Caterpillar sits on $2.3 billion in cash as of September 30, 2010. The debt-to-capital ratio for Machinery and Engines improved to 39.1% as of September 30, 2010, compared with 49.5% as of June 30, 2010.
For fiscal 2010, Caterpillar expects revenues in the range of $41 billion to $42 billion and EPS in the range of $3.80 to $4.00. Caterpillar anticipates revenues to approach $50 billion in fiscal 2011.
Our Take
This 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 U.S.-based manufacturer of surface and underground mining equipment. We believe Caterpillar’s strong brand name, pricing power and global dealer network places it in an advantageous position to exploit the growing need for infrastructure development worldwide.
Caterpillar’s previously announced investments of roughly $2.5 billion in the United States, Brazil, China and India involving opening new facilities, expanding existing operations and developing a new mining shovel product line, will boost its long-term potential. We currently have 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.
BUCYRUS INTL A (BUCY): Free Stock Analysis Report
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TEREX CORP (TEX): Free Stock Analysis Report
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